Loading...
HomeMy WebLinkAboutCOM 0505.003 2002-2004 AKINAKA 6 ASSOCIATES, LIMITED ALSTON HUNT FLOVD & ING ASHFORD & WRISTON BANK OF HAWAII BELT coLLINS HAwnn. UNITED HAWAII LEEWARD PLANNING CONFERENCE CADES SCHUTTE PEENING & WRIGHT P^. BO%4159. KAMUELA. HAWAII 96]13-2159 CENTEX HOMES CENTRAL PACIFIC BANK CLARK REALTY CORPORATION DAN BOLTON, iNC. EARL E. BAKKEN FOUNDATION RE(;tJy[~ EAST-WEST CONSULTING SERVICES, LLC February 26. 2004 FIRST HAWAIIAN BANK 11LBD.~. _ pp,,,, _ GREEN WELL FARMS, INC. 1Q+fV'^ HAWAII LAND COMPANY HAWAII PLANING MILL, LIMITED ~i.W1Mr Goerxil~l'- Pw=iRC HAWAII ELECTRIC LIGHT COMPANY HoKUUAiocEANSIDE Izso Councilman Gary Safarik, Chair HOLUALOA COMPANIES HUALALAI DEVELOPMENT COMPANY Councilman Joe Reynolds, Vice Chair IMANAKA, Kuoo a Fu~IMOTO Committee on Public Works & Inter overnmental Relations KAHUA RANCH LIMITED 9 KAI HAwnn, INC Hawaii County Council KAMEHAMEHA INVESTMENT CORP KAMEHAMEHA SCHOOLS 25 AUpuni Street KAUPULEHU DEVELOPMENTS Hilo. HI 96720 KEALAKEKUA RANCH KEALIA RANCH KEAUHOU KoNA coNSTRUCnoN CORP. RE: INFRASTRUCTURE RESOLUTION 159-04 KOBAVASHI GROUP. LLC KOHALA RANCH, LLC KONA TRANSPORTATION COMPANY KTA SUPER STORES Dear Chairman Safarik, Vice Chair Reynolds, and Committee LANIHAU PROPERTIES, LLC L'ORANGE & ASSOCIATES Members: MacFARMS OF HAWAII MARVL GROUP. INC. MAUNA KEA PROPERTies I am John Ray. President of Hawaii Leeward Planning Conference MAUNA LAw sERVicE, INC (HLPC), testifying in regard to Resolution 159-04. HLPC has MCCANDLE55 LAND & CATTLE COMPANY McCORRISTON MILLER MUKAI M[KINNON participated in all significant County and State planning efforts to M a E PAaFIC, INC identify and support infrastructure development in West Hawaii for MEN EHUNE DEVELOPMENT COM PANV MooERS ENTERPRISes, LLC the past 30 years. We support the intention of Resolution 159-04 to NATURE CONSE RVANCV OF HAWAII OCEANIC TIME WARNER CABLE OF HAWnl] bring renewed efforts to address these critical issues. OKAHARA & ASSOCIATES PACIFIC RESOURCE PARTNERSHIP PARKER RANCH, INC With our testimony we have included 5 documents: PBR HAWAII PONOHOLO RANCH, LIMITED QUEEN EMMA FouNDAno" 1 Assessment of the Ma or Infrastructure Needs for the QUEEN LI LIUOKALA NI TRUST I R.M. TowILL coRPORATION ~ Northwest region, County of Hawaii Planning Department, RIEHM OWENSBV PLANNERS ARCHITECHTS March 1988 SAM O. HIROTA, INC. sANDwICH ISLES coMMUNlcnnoNS, ,NC 2. County of Hawaii Infastructure Financing Analysis and Plan SSFM INTERNATIONAL, INC. SURETY KoHALA coRPORAnoN prepared by Sutro & Co., Inc., 1989 TrTLE GUARANTY EscROw sERVres, ~r,;c 3. Pa in for Growth in '-iawaii. Land Use Research Foundation TSA CORPORATION Y 9 vERrzoN HAwnn, rnC of Hawaii, 1988 WAIMEA WATER SERVICE, INC. WASTE MANAGEMENT OF HAWAII 4. Paying for Hawaii's Infrastructure, ASymposium on wnTER RESOUaces INTERNAnoNAL, INC Innovative Infrastructure Financing. WES THOMAS ASSOCIATES, INC. wesT HAwnn coNCRETE 5. Property Tax Revenues from Premium Resort-Residential wlLSON oKAMOTO coRPORAnoN Homes and Condominiums in West Hawaii, re ared b WIMBERLV ALLISON TONG & GOO P P Y Decision Analysis Hawaii, Inc. for HLPC, 2003. In the mid 1980's. West Hawaii was identified as one of the significant growth areas in the State of Hawaii. There was a sense of urgency in pro-actively addressing major foreseeable infrastructure needs. The strong emphasis was on developing comprehensive infrastructure financing mechanisms to address these needs. The problem then and now was not a lack of P.O. BOX 2159 development plans. The County Keahole to I~ilu~D~~elopment sp KAMUELA, HAWAII 96743 0111 TEL: 808.885.9588 ~J p{A~I~~j Fwx: sosses.9s9o Ref. To: Pn fayr-.. L11+nnnltt~'t nlpc~gte.net ~ RBf, DOtC Page Two Plan (1990) and the current County Keahole to Honaunau Regional Circulation Plan (2003) are both excellent guidelines. We need to constantly refine these plans to reflect the most current level of planned development, and we need to constantly prioritize our infrastructure needs, but the real challenge lies in how to pay for these needs. The included documents provide an excellent guideline. As an organization which represents the large landowner and development community on the island we have recently agreed to focus the majority of our resources on infrastructure issues. Our internal priorities are: 1. Appoint an HLPC Infrastructure Subcommittee 2. Produce West Hawaii Regional maps showing land ownership, current development plans and infrastructure overlays -primarily roads and water 3. Prioritize infrastructure needs 4 Identify key partnership opportunities for collaboration on infrastructure development 5. Seek input on current infrastructure financing mechanisms and strategies most applicable to meet our needs. We have had preliminary discussions with the County Administration and the State Land Use Commission who have indicated their strong willingness to participate in these efforts and we hope the County Council will similarly agree. In regard to the specific resolution before you today, we have several suggestions. First, we believe it should be more comprehensive in nature and address a wide range of infrastructure needs including transportation water, sewage disposal, solid waste, parks and housing. Second, we'd like to point out that many of the transportation projects contained in the resolution are somewhat outdated or inaccurate and should either be revised or referred to in general. Thirdly, we don't support the inclusion of the moratorium language because we believe a moratorium or cessations of building permits would have disastrous consequences. Thank you for the opportunity to comment. Regards. ~ ~ `2 John B. Ray President Hawaii Leeward Planning Conference Assessment of the Major Infrastructure Needs for the Northwest Hawaii Region Phase t Report Infrastructure Implementation Planning Program County of Hawaii Planning Department March 1988 Bfi . i ~ ~ ~ ~ ~J Assessment of the Major Infrastructure Needs for the Northwest Hawaii Region J _1 Phase I Report Infrastructure Implementation Planning Program t Y County of Hawaii Planning Department I March 1888 L L L + Table of Contents J Introduction 1 Executive Summary 3 1 Population Trends 8 Northwest Hawaii District Trends .10 ' Northwest Hawaii Population Projections .16 { Projections for Infrastructure Planning 26 ••J Alternative Development Scenarios 30 Water Requirements 36 Solid Waste Requirements 48 Sewage System Requirements 49 Park Requirements 53 I Road Requirements 57 i Drainage Requirements 61 Summary of Major Infrastructure Development•Costs• 61 Major Findings and Conclusions 67 ..Y J J J l INTRODUCTION The expected growth in the Northwest Hawaii region including the districts of Hamakua, North and South Rohala, North and South Kona, will be putting additional demands on the infrastructural systems in that area. Already. some of the systems are showing signs of strain, traffic congestion is increasing and water systems have been constraining potential developments in some areas. In response to this growing problem the county initiated the Infrastructure Planning Program in 1986, and since that time the work on developing infrastructure has moved on several fronts: 1) Assessing the legal authorities and responsibilities of 11 the county.. ,r 2) Development of a proposal to allow for a coordinated review and implementation of the county's capital improvement T program. 3) Development of a fiscal projection model for the county of Hawaii to allow projections of future financial resources and needs. 4) Development of the legal structure for an impact fee bill. 5) Analysis of the traffic system through a computer traffic simulation model (on-going). 6) Development of a computerized Geographic Information System ~ (GIS) for the Northwest Hawaii area. i 7) A broad assessment of the infrastructure requirements for the Northwest Hawaii region. The portions of the Infrastructure Planning Program undertaken I to date provide tools for the analysis of future physical and L -1- L 1 financial requirements for the development of the Northwest Hawaii community as well as reviewing the legal foundations of the county's role in infrastructure development. Further work proposed will include the development of a ~ ' comprehensive financial plan for the funding of infrastructure improvements, and the creation of area specific infrastructure development strategies to identify and prioritize the capital improvement projects. Together, the elements of the infrastructure .I planning program should result in the development of infrastructure ~ in those areas where the greatest growth needs will occur. ~I This report focuses on the assessment of infrastructural } requirements and provides an overview of the cost of the major components of the infrastructural system. With the assessment of the infrastructure needs the magnitude of the problem will be identified and the work on otential solutions can p get underway. l r. -2- L L EXECUTIVE SUMMARY I Population Growth Trends and Projections The population growth in Northwest Hawaii has been continuing for the last decade and beyond. The estimated population of the area was 42,300 in 1986 and is projected to increase substantially. The rate of growth will be influenced by the pace of economic ~ development, in particular the growth rate of the visitor industry. As projected in the General Plan the population of the island could range from 173,000 to 258,000 by the year 2005. For infrastructure planning purposes an islandwide population level of 170,000 was i selected resulting in a projected Northwest Hawaii population of 84,000 residents. i Alternative Development Scenarios The population growth to 84,000 represents a doubling of the population in the Northwest Hawaii region. This doubling could L occur in many different ways, however, so for analysis purposes four alternatives have been identified: L 1) Trend Oriented Growth: Projects future growth as an extension of the recent development patterns. This pattern L continues the present dominance of Kona as the growth L center for housing development. 2) Present General Plan Pattern: Projects growth to result in a pattern of the current General Plan, though at a much L -3- L J lower overall development level. This pattern reflects a growing role for Lower South Kohala as a housing area. J 3) Proposed General Plan Pattern: Projects growth to result in the distribution pattern depicted in the proposed General Plan, though at a much lower overall development J level. This pattern further accentuates the role of Lower South Kohala as a major housing area putting an increasing proportion of the housing in close proximity to the resort development areas. 4) Water Oriented Patterns: Projects more growth in the areas J where water sources are most readily developed. This pattern puts more growth in North Kohala and Hamakua followed by Kona, then Lower South Kohala and Waimea. Maior Infrastructure Costs For each of the alternatives the following infrastructure costs were projected: 1) Water: The major off-site facilities (wells, major ___...111"' transmission lines, reservoirs) were projected for J residential use only. The proposed North Kohala to South Kohala transmission line which is preliminarily estimated to require $48 million was not included. J 2) Solid Waste: The costs of transfer stations and a new landfill were calculated for the different scenarios. 3) Sewage Disposal: Projected plans and costs for public J sewage systems are listed. J _4_ J I 4) Parks: The development costs for public neighborhood, community, regional, and beach parks, and a municipal golf course are tabulated. Costs cited do not include land costs. 5) Roads: Major improvements to the major arterials are I tabulated. The cost of intersection improvements, or other comparatively small scale improvements are not included. i 6) Drainage: Improvements to the major drainage ways in Kona are tabulated. Other areas in Northwest Hawaii do not have i ` such major problems. The results of these tabulations for each scenario are shown on the following table. In all cases the total costs are similar, though the component costs vary considerably. The highest cost item in all cases is sewage disposal followed by roads, water systems, drainage and parks. Maior Findings and Recommendations r The analysis of the alternatives provides a comprehensive look at the magnitude of the major development costs needed for the I Northwest Hawaii region if it is to accommodate the growth projected. Based on these cost estimations the following findings f are proposed: 1) The total cost tabulated is approximately $450 million. It should be noted that this does not include infrastructure I requirements for the rest of the island. -5- Summary of Major Infrastructural Costs for Alternative Development Scenarios Trend Oriented Dwelling Unit Water Solid Public Major Scenario Units Dist Cost Waste Sewers Drainage Roads Parks Total Kailua South 9,920 32.0$ 515.6 50.8 $39.5 552.9 513.7 57.4 f123.9 Kailua North 10,850 35.0$ 526.2 50.6 fb6.2 51.2 528.0 Sd1.5 E1dt.i Kukio 310 1.0$ 51.1 35.0 50.0 0.0 50.0 57.0 f7.1 Lower S. Kohala 3.100 10.0$ 55.0 50.6 59.1 50.0 522.5 56.5 f43.1 Kawaihae 310 1.0$ 50.3 50.0 516.9 50.0 f35.0 50.0 ;52.2 Waimea 3,100 10.0$ 53.2 50.2 628.5 51.0 ;11.0 ~5.3 fb9.2 Wanokaa 1,860 6.0$ 2.4 0.0 526.5 f0.0 f0.0 0.0 528.9 Kohala 1,550 5.0$ 51.3 50.0 50.0 50.0 50.0 E0.0 51.3 Total 31,000 100.0$ 555.2 57.2 5166.7 f55.1 5110.2 S55.T 5468.1 r Percentage 12.3$ 1.6$ 36.8$ 12.3$ 24.6$ 12.4$ 100.0$ ~ Present GP Dwelling Unit Water Solid Public Major Scenario Units Dist Cost Waste Sewers Drainage Roads Parks Total (ailua South T,843 25.3$ ER.7 50.6 6s39.5 $52.9 313.7 $1.d 3116.8 Kailua North B,6b9 21.9$ 576.4 50.4 $44.2 51.2 f28.0 E4'.S ;131.7 J Kukio 341 1.1$ $1.3 55.0 E0.0 40.0 $0.9 $1.0 j7.3 Lower S. Kohala 6,045 19.5$ 511.4 50.8 9.1 50.0 522.5 57.2 $51.0 'Kawaihae 1,767 5.7$ 53.5 50.6 516.9 50.0 535.0 55.3 561.1 Waimea 2,790 9.0$ 52.5 50.2 f28.5 f1.0 511.0 55.3 548.5 Honokaa ',626 4.6$ 50.9 E0.0 526.5 SO.D s0.0 50.0 527.9 Kohala 2,139 6.9$ 52.1 O.d 50.0 0.0 90.0 50.0 f3.1 o tal 31,000 '00.0$ f40.6$ 51.7$ $136.8$ f52.3$ $12d.T$ $63.8$ $400.$ ercentage Proposed SP Dwelling Unit 'Rater Solid Public Major Scenario Units Dist Cost Waste Sewers Drainage Roads Parks ?otal Kailua South 5,270 17.0$ 50.2 $0.0 539.5 ;52.9 573.7 E0.7 E107.0 Kailua North 8,060 26.0$ $13.8 SD.4 $44.2 EL2 328.0 f61.S 3129.' Kukic 1,1d7 3.1$ 54.8 f5.0 fD.D fD.D fD.D Et.C $10.3 ,r '_ower S. Kohala 8,7d2 28.2$ $17.3 E7.0 E9 $0.0 $22.5 f16.3 $66.3 dawaihae 2,697 8.7$ f5.5 f0.5 516.9 f0.0 $35.0 $5.3 $63.3 'Waimea ',736 5.5$ 50.2 50.7 $29.5 31 .C E11.C $O.C S4 C.' Hononaa 2,0". fi.5$ 3.C 0.0 S26.S ED.C 3C.C 3C 329.= i (ohala s.3$ 50.3 SD.3 50.0 30.C SO.C 50.: iC.3 ~ -ctz', 3'.,JCC 'C0.3$ $dS i7 316d.7 855 31 C 365.- Sd;°. 'ercentace 'C.2$ 6$ 36.3$ 12.3$ 2d.6$ 'd.S$ CC.O$ I ~ Water Oriented Dwelling Unit Water Seiid Public Major Scenario Units Dist Cost 'Haste Sewers Drainage Roads ?arks Tota'' o.~ (ai'ua Sou;a 3,000 25.9$ i9.2 iO.S 339.5 552.9 213.' 31.: 51'.7.3 Kailua No; 'r. 9,S CC 27.7$ b16.: 30.G 54x_2 37 523. 841.. •'C' (ukio '~"0 C 3$ SC.2 5`- 50.: iC iC._ 55 . ower Kohala 2,000 6.6$ 32.6 $C 89.'. S" X22.: iC3 (awaihae JC0 '.C$ ~C. c^ i1S ? '$C. S3S °S~ Waimea ^C 6.S$ 4C. 80. 128. fl ~ iC ~.cnoHaa :CC 'S.'$ 513.' 80.i S2S.` 50 ~i0.: SC.. i 1ona~~.a '6. '.a 3^-.6 :C.S iC._ iC.. J :;al 31,300 100.3$ SS2.S S7. 316d. 5`S S": i49.' >.C9.. ~ertentace '2.=~ 25.~$ ~ CC. ,ti 9 5 .9 Y,~ _ 7 POPULATION TRENDS The economic changes that have affected the island of the Hawaii J over the last 15 years have had many effects on the island's residents. These economic trends include the reduction of sugar production, growth in tourism and diversified agriculture, and J increases in the level of urban services available on the island. One of the adjustments brought by the economic changes has been ~ changes in the population level. From 1970 to 1986 the total island population increased by 76 percent from 63,468 residents to an estimated 111,800 in 1986. This growth trend has been sustained over the entire period though there have been ups and downs in-the economy. The closure of Kohala Sugar and Puna Sugar companies were major setbacks for the island and especially for the people and businesses J directly and indirectly related to those specific operations. Conversely, the increasing growth in tourism has resulted in increased economic opportunities for the residents, particularly on the west side of the island. Through it all the general growth trend has been strong and is expected to continue. I The historical trends and population projections prepared for the General Plan Revision Program are shown in Figure 1. The variation between the projections is due to the varying growth rates assumed for tourism, diversified agriculture, and new industries, r and the rate of decline in sugar employment. Even at the lowest growth rate, however, the strong upward trend is expected to continue. -8- i Island Population Projections ' Fig. 1 ?oputation (Thousands) 300 i i I 250 ~:eries ~ ' Series B 200 ~ I ~ ,Series P_ i ~5C ~ I ~ 100, 50 '970 1975 i98iJ 1985 1696 1995 2CCC 2:,GE Source: ?tanning Oep;. County of Hawei ~enerai ?lac L I `L L _g_ l L L L Table 1 Population by Districts - Island of Hawaii 1970 Percent 1980 Percent 1986 Percent L Puna 5,154 B.SAi 11,751 12.8Ai 18,397 16.5A6 South Hilo 33,915 53.4 42,278 45.9Ai 44,968 40.2 North Hilo 1,881 3.OA; 1,679 1.8~ 1,505 1.3A; L Hamakua 4,648 T.3A; 5,128 5.6~ 5,314 4.8Ai North Kohala 3,326 5.2Ai 3,249 3.5~ 3,530 3.2Ai South Kohala 2,310 3.6A4 4,607 5.OAi 6,656 6.OAi ` North Kona 4,832 7.6AS 13,748 14.9X 19,670 17.6Ai I(r. South Kona 4,004 6.3~ 5,914 6.4~ 7,113 6.4A; Kau 3,398 5.4Ai 3,699 4.0~ 4,612 4.1A; Total 63,468 100.OAi 92,053 100.OAS 111,765 100.0 Source: County of Hawaii Planning Department State of Hawaii, DBED Statistical Reports L L L L L L L -11- L North Kohala. North Kohala's population level has been remarkably stable given the economic transformation that has taken place with the switch of its economic base from sugar to tourism over the last 16 years. The population is now estimated to be increasing at a low rate and this is mirrored in the changes to the L housing supply, i.e., a slow rate of growth. Most of the housing is located in or near the Hawi-Union Mill area and the planned L expansion at Ainakea would only add to this concentration. The level of traffic in Kohala is increasing slowly and additional traffic could be handled with some adjustments. The major traffic-related concern expressed is the increased use of-the Rohala Mountain Road which is the only direct link to Waimea and is ~ below current standards for high-speed traffic. The water system will require expansion to meet further growth, though given the water table and the soil conditions it is anticipated that such expansion can be accommodated at a reasonable cost and with low risk. Additional solid waste transfer facilities may be required ~ should the population grow significantly. The parks, police and L. fire facilities are adequate to meet the short term needs of the community. South Kohala. The South Kohala district has been growing strongly along with North Kona. Together these two districts have L set the pace for development in Northwest Hawaii. Population growth has shown a 44 percent increase from 1980 to 1986 and this growth is L anticipated to continue and perhaps accelerate with the opening of L the Hyatt and Rite-Carlton hotels in the near future. The housing L -12- in South Kohala has long been focused in Waimea, with smaller settlements at Kawaihae Village, and at Puako. Recently, resort condominium development at the Mauna Kea Beach Hotel property, Mauna Lani and Waikoloa Beach Resort have added to the stock. Waikoloa Village is continuing its growth and now accounts for about 20 percent of the total housing inventory for the South Kohala district. Waimea's growth has been largely been through the in-filling of subdivisions created several years ago. New development in Waimea is currently constrained by the water sources available. The potential availability of high-level ground water is being investigated at the present. Should this provide sufficient water added growth growth could be possible. The alternatives to such ground water would be surface sources, such as the long dormant Rohakohau dam proposal or by creating additional diversions and storage facilities elsewhere on the Kohala Mountains. Traffic through Waimea will become a greater problem with the growth of the region and is a major concern expressed by the community. Similarly, the capacity of the road from Kawaihae to Waimea is also a matter of concern due to its alignment and grade. The coastal area is well supplied with transportation facilities in the Queen Kaahumanu Highway. Water for development in this area is provided from Waimea or the series of wells located at the 1200 r foot elevation above the resorts. Waikoloa Village has been in existence for more than two decades and is now beginning to enjoy the growth anticipated earlier. All _ facilities in this area have been provided by the developer. The -13- i inventory of vacant lots will provide some of the housing needed in t the near future and further expansion of the subdivision is expected at the market grows. The expanding development will require additional water and will reach the level which requires additional park, solid waste, and protective services. L The growth potential for this district will require that all public facilities and services be expanded over time, including water, parks, solid waste, sewage, and protective service facilities. North Rona. North Kona's growth has increased the district's L role from a rural agricultural community to a major resort area and ~ the center for business and service on the west side of the island. Population trends have increased North Rona's share of the total L island population from 7.6 percent in 1970 to an estimated 17.6 percent in 1986. The growth in housing units has also been strong, though hundreds of resort condominiums are included in the recent additions. The bulk of the increase in the housing stock has been L from the Kona Palisades subdivision back to Keauhou. Within this broad area several subdivisions are being filled and a several new l subdivisions have been added. Multiple family units are gaining L acceptance for residential use due to price constraints. The mauka communities have also grown though overall the trend has been a large scale shift away from the tradition mauka communities to the [ more city-like concentrations between Keauhou and Keahole Point. L Traffic is becoming an increasing source of concern with the L continuing growth in the area. In 1984 the State finished the Queen Kaahumanu Highway extension to tie into Kuakini Highway in the -14- L _ vicinity of the NAPA Auto Parts store. With that improvement there was great relief to the congestion on Palani Road and on Kuakini ` Highway through Kailua. However, with the current growth in Kona in general and Railua's commercial facilities in particular Palani Road - is once again becoming congested. Above the Queen Raahumanu Highway, Palani Road is approaching its design capacity. Based on recent traffic studies, the Queen Kaahumanu Highway is projected to reach its design capacity in the near future. The water system has been a constraint for several years due to - the increasing demands being placed on it. New water sources are being investigated by both public and private interests to allow for the continuing development of the land. - Solid waste facilities are an area of concern due to the expansion of the Kailua around the current dump site. The relocation of the dump is currently planned. The public sewage treatment facility serving Railua is up to capacity and a new plant ` is being designed to be located further north. Parks in North Kona have predominantly been along the shoreline. New facilities have been added at the old Kona Airport ` site and more are planned. As with South Kohala, the magnitude of growth expected will require that all public services and facilities will have to be i ~ expanded to meet the increased requirements. South Kona. While North Kona has been growing rapidly South ~ Kona has been moving at a more moderate rate. Growth in South Kona L has matched the overall growth rate of Northwest Hawaii but has not L -15- L lead it as North Kona has. Cu=rent development patterns have put greater emphasis on areas at the northern end of the district, especially in the vicinity of Realakekua. The traffic situation in the mauka communities is poor and may get worse as the general traffic levels in the northwest Hawaii area ` increase. The presence of only one road though these communities is creating the difficulties. The water system is generally adequate and source development in South Kona is possible given the experience of other water wells in this area. However, new land development activity is being constrained by the lack of uncommitted water source capacity, and some existing areas cannot get water w service due to distribution system constraints. Other public facilities such as parks and solid waste transfer facilities will have to grow with the population. Northwest Hawaii Population Projections The General Plan revision draft contains three projection series which project the island's population under different economic development scenarios. These scenarios range from the gradual shrinking of the sugar industry labor force to the complete closure of all sugar operations, the growth in tourism from slow to rapid, and the potential for more rapid expansion in the diversified agricultural sectors. For Northwest Hawaii all of these projected growth rates would entail considerable expansion in visitor facilities, population, housing requirements, commercial and L industrial uses, and in infrastructure requirements. L -16- The projections for the island and the combined districts of Hamakua, North and South Kohala, and North and South Kona are shown in Figure 2. As can be seen in that figure the projected population in Northwest Hawaii is expected to be strong in all cases and Northwest Hawaii's share of the total island population is expected to increase substantially. As of 1986 the Northwest Hawaii region is estimated to have ~ 42,300 residents out of a total is l""and population of 111,800 or 38 percent of the total. By 1995, the Northwest Hawaii Region's share " could grow to 43 percent and to 49 percent by the year 2005 (Series B). In overall terms this could result in a population increase of 149 percent in Northwest Hawaii over the next 17 years. ` The expanding population is already putting additional pressures on the housing stock in this area and the pressure will intensify as - growth proceeds. As seen in table 2 this would mean 19,800 to 23,900 more households by the year 1995 and 28,000 to 42,800 by the year 2005. If these projects are realized they will entail the ~ expansion of the current housing stock by 2.0 to 3.0 times its ~ current size over the next 17 years. I I L Distribution of Growth The exact location of this expansion is difficult to predict since there are several growth options available. The projections in the General Plan draft document assume the shares are shown in table 3 for the population in the year 2005. This distribution of -17- l I L I L Population Projections Fig. 2 -Island and Northwest Hawaii Region y Population (Thousands) i 300i ~ 250! ~ Series C ~ Series B 'r, 200 I I Series A I '.501 Series C i Series B . ,.0 , Series A ~ C L 197~~ "975 1980 "985 199C '995 2000 ~~GS 3ouroe: °!annmg kept. County of Haweii ~enerat plan L L ~ -18_ I Table 2 Population and Household Projections for Northwest Hawaii [ Summary 1995 2005 Series A West Hawaii Population 59,200 84,100 Household Size 3.0 3.0 f Households 19,800 28,000 l Series B West Hawaii Population 63,500 105,500 Household Size 3.0 3.0 Households 21,200 35,200 Series C West Hawaii Population 71,700 125,400 Household Size 3.0 3.0 Households 23,900 42,800 ~ Source: County of Hawaii Planning Department General Plan Revision Program 1987 I r r -19- L Table 3 Projected Population Distributions by District Year 2005 L District-______Series A Series B Series C Puna 39,800 49,900 59,300 South Hilo 44,100 55,300 65,800 North Hilo 2,200 1,500 1,800 ` Hamakua 5,400 6,700 8,000 North Kohala 5,400 6,700 8,000 'i South Kohala 19,200 24,100 28,600 North Kana 43,200 54,300 54,500 South Kona 10,900 13,700 16,300 Kau 3,800 4,800 5,700 Island Total 173,000 217,000 248,000 ` Source: County of Hawaii Planning Department General Plan Revision Program 1987 L L L L L C L -20- population is by no means certain, however, and will be affected in large part by the ability to supply the required infrastructure for development. The data on the potential distribution of growth was developed on the county's Geographic Information System. This system is a computer based map analysis system which provides a wide range of r functions. For the purpose of this study the Northwest Hawaii region data was inputted into the system for eight areas as shown in Figure 3. These areas are the standard reporting areas referred to in the tables to follow. I The possible distribution of growth will be influenced by the _J General Plan Land Use Pattern Allocation Guide Map, State Land Use and County Zoned Districts, and.the availability of infrastructure. All land uses in the areas that the county has jurisdiction must be in conformance with the General Plan. Thus, when considering potential patterns of land use and infrastructure demand the first consideration should be the potentials for development under the General Plan. The General Plan land use maps are general directions that growth can take and do not represent fixed lines nor densities. For example the Medium Density Urban Designation allow for residential units up to 35 units per acre. Within these designations a variety of densities could occur during actual development. The current General Plan map shows potential expansion around the Honokaa, Kohala, Waimea, Waikoloa Village, the mauka Kona urban areas, and large scale expansion between Keahole Airport and -21- Kohaln Honokm ~ Woimsa Kawaihas l.ow~r South Kokola Kukia Kailua ~ Tlo~th L L Knilun Sou+h L G18 ANAt.Y515 /a12EA5 I~ Fi9ure 3 L -22- L i L Keauhou. This pattern is largely the same as the original 1971 L General Plan Land Use Pattern Allocation Guide Map. The pending General Plan amendment proposals currently being L considered by the county would delete some urban expansion around the mauka Rona communities, add urban areas south of Keauhou toward Raawaloa, and add other urban areas below Waikoloa Village, and in Honokaa. in Waimea urban expansion would be reduced in Puukapu and increased in upper Lalamilo. In Kohala urban expansion would be directed to those areas makai of the Mamalahoa Highway, while new L urban areas would be added at Kohala Ranch and at the Hawaiian Homes L Lands at Rawaihae. A computation of potential development under the respective ~ versions of the General Plan map assume the following: GP Designation Assumed Development Density Low Density 10,000 square foot lots 3.3 units/acre Urban (no ohana units) Medium Density 7,500 square foot lots 4.4 units/acre L Urban (no ohana units) L High Density Non-Residential Zero Intensive Ag Non-Residential Zero ( Orchards Non-Residential Zero L Industrial Non-Residential Zero Resort Non-Residential Zero Alternate Urban 10,000 square foot lots 3.3 units/acre Expansion (no ohana units) L l -23- ` Based on these assumptions the current General Plan and the proposed General Plan Land Use Maps were run through the GIS system. The current General Plan would allow approximately 103,500 units for the urban areas in the Northwest Hawaii area under the above development density assumptions (see table 4). This level of growth would support a population of about 310,500 people, assuming three persons per household, which is 2.5 times the high projection for i the year 2005 for Northwest Hawaii. The current General Plan places about 53 percent of all urban residential capacity in Rona with 20 percent in lower South Kohala and the rest distributed amongst Rawaihae, Waimea, Honokaa, and Rohala. The proposed General Plan map would allow approximately 166,700 units for the urban areas in West Hawaii which would support a population of about 500,100 people. This level of population is about 4.0 times that expected under the highest projection shown in the General Plan. f This large expansion in the total capacity of the General Plan urban designated areas both enlarges the potential development area it also shifts the balance toward the lower South Kohala area while ` de-emphasizing the Kona area in relative terms. This de-emphasis is in relative terms only since the Kona area's potential under the proposed General Plan is still increased from approximately 55,000 units to approximately 71,000 units. Under either scenario the land use pattern as depicted in the current and proposed General Plan land use maps are well beyond the L -24- L Table 4 Potential Residential Units Under Present and Proposed General Plan - Land Use Allocation Guide Maps 1987 General Plan Proposed General Plan _ Analysis Areas Units Percent Units Percent Kailua South 26,133 25.3% 28,334 17.0% Kailua North 28,900 27.9% 43,298 26.0% Kukio 1,141 1.1% 6,153 3.7% Lower South Kohala 20,182 19.5% 47,000 28.2% Kawaihae 5,878 5.7% 14,484 8.7% _ Waimea 9,311 9.0% 9,299 5.6% Honokaa 4,746 4.6% 10,878 6.5% Kohala 7,167 6.9% 7,230 4.3% Total 103,458 100.0% 166,676 100.0% Source: County of Hawaii Planning Department ~ -25- i` I near and intermediate term needs for the future. For infrastructure planning purposes a somewhat tighter pattern for land use distributions needs to be considered so that the investment in r infrastructure is more carefully focused. ( Projections for Infrastructure Planning ( For infrastructure planning purposes it is more meaningful to use a set of figures that are likely to be achieved within the life of the infrastructure rather than using the highest growth rate that ` can reasonably be projected. Projecting community growth is not, however, an exact science so the potential and need for adjustment should always be kept in mind. Based on the growth that would be brought about by the impending development of the resorts it is expected that the population of the t island could grow from the present 111,800 to 170,000 in the next seven to seventeen years (1995 to 2005). This figure represents a l 52 percent increase for the entire island and is expected to f increase the Northwest Hawaii population from 42,300 in 1986 to 84,000. Growth of this magnitude will essentially double the [ population of Northwest Hawaii and generate the need for approximately 31,000 housing units assuming constant household sizes and vacancy. ( The doubling of the community could occur in many differing t patterns. The population distribution could be similar to the [ present pattern or radically different. To assess the possibilities four scenarios have been developed for evaluation: -26- L ~ 1) Trend Oriented Growth: Projects future growth as an L extension of the recent development patterns. This pattern ` continues the present dominance of Kona as the growth center for housing development. i ~ 2) Present General Plan Pattern: Pro ects j growth to result in L the distribution pattern depicted in the current General Plan, though at a much lower overall development level. This pattern reflects a growing role for the lower South Kohala region as a housing area. ~ 3) Proposed General Plan Pattern: Projects growth to result ~ in the distribution pattern depicted in the proposed r General Plan, though at a much lower overall development ~ level. This pattern further accentuates the role of lower r South Kohala as a major housing area putting an increasing ~ proportion of the housing in closer proximity to the resort development areas. I ~ 4) Water Oriented Pattern: Pro ects more j growth in the areas where water sources are most readily developed, subject to the constraints imposed by the current General Plan, and i L relatively less growth in areas where water sources are more difficult to develop. This pattern then puts more L growth in North Kohala and Hamakua, followed by Kona, the lower South Kohala area and Waimea. Recent Trends In The Development Areas The recent trends in dwelling units within the GIS analysis areas (see table 5) show that most of the current housing. inventory -27- is located within the Railua South, and Railua North areas followed by Waimea, Honokaa, Kohala, Lower South Kohala, and Kawaihae areas _ in that order. Recent development trends show that the Rona area is the largest development area followed by Waimea, Lower South Kohala, and Kawaihae areas in that order. r V ~I J i r r ti . -28- r L L L Table 5 L Residential Units in 1985 and 10-Year Trend L 1985 1976-85 GIS Areas-------------- -Units Percent-------Units Percent Kailua South 5,225 34.TAS 2,293 3T.2AS L Kailua North 4,928- 32.TAS 2,4b2 40.OAS Kukio 54 0.4AS 3 .OAS Lower South Kohala 833 5.5AS 539 8.8A; L Kawaihae 165 1.SAS 66 1.1A; Waimea 1,663 11.1Ai 556 9.OAS Honokaa 1,182 7.9A; 76 1.2AS Kohala 999 6.6Ai 163 2.6AS Total 15,049 100.OAS 6,158 100.OAS L Source: County of Hawaii Planning Department L L L L L L L L -29- L ALTERNATIVE DEVELOPMENT SCENARIOS Alternative 1: Trend Oriented Development (Figure 4a) The first alternative is a rough extrapolation of the recent development trends: strong growth in Kona, an increasing share of the market going to lower South Kohala, Waimea continue at its past rate and with limited growth Honokaa and Kohala. The results of these trends as shown on table 6 places two-thirds of the housing i units in Kona, ten percent in Lower South Kohala and Waimea - balancing the South Kohala population between these areas, and reducing the relative importance of Kohala and Honokaa as housing support areas. Rawaihae and Rukio remain minimal in their role as housing areas. Alternative 2: Present General Plan (Figure 4b) The present General Plan alternative takes the percentage distribution of development as represented on the present Land Use Pattern Allocation Guide Map and applies that to the projected f 31,000 dwelling units which would support the Northwest Hawaii r population of 84,000 people. The results of this allocation are II shown in table 6. The Kona area remains the largest housing area C though at a much reduced role - 53 percent of the total as compared to the present o7 percent, while the Lower Kohala and Kawaihae areas increase their combined shares to 26 percent as compared to the present 7 percent. Waimea would grow in proportion with Northwest Hawaii while Honokaa, Kohala, and Kukio would continue to play minor roles. To achieve this development pattern, 43 percent of the new -30- Trend Oriented Scenario Fig. 4a -Distribution of Housing - Units (Thousands) 12 ~ i 10 ~ r 8 I 6 I 4 I I 2 I i 0 ~ S. Kaiiue N. Kailua Kuklo ~.S.KOhala Kewaihae Waimea Honokaa Kohala ® Total Current Net Change Source: Planning Debt. County of Hawell Present GP Pattern Scenario Fig. 4b -Distribution of Housing r I ' ~ni is 1 ~ housands; 10 i S~ r 5. ~ ~ j 2~i ,t i J Kaiwa S. Kaiiua 'J. KuKw LS.KOhais Kawaihae Waimea nonoKea Kona~a ® Total ~ Curren; ~.et Charge Source: Planning Dept. County of Hawaii ~ -31- Proposed GP Pattern Scenario Fig. 4c -Distribution of Housing Units (Thousands) i2 I i 0 I 8 L 8 4 - 2 r I 0 Kallue S. Kailua N. Kukio t_. S.KOhala Kawaihae Waimea Honokea Kohai9 ` ~ Total Current ®Net Change Source: Planning Dept. County of Hewail ` Water Oriented Scenario - f Housin Fig. 4d Distribution o g ~nlts ;Thousanas; G ~ L 6~ L 1 ~ i 21-~ I 1 i1 ~ L ~ Kailua ~ Kaiwfl ~V. KUKiO _ S KonaiaKaweinae Waimea 7onoKaa Kona~a L ~ TOtal C~rrren; Net Change L Source: Plannmg Dept. County a! Hawai! -32- L Table 6 Alternative Development Scenarios Trend Oriented Dwelling 1985 Net Scenario Units Percent Units Percent Change Percent Kailua South 9,920 32.0% 5,225 34.7% 4,695 29.4% Kailua North 10,850 35.0% 4,928 32.7% 5,922 3T.1% Kukio 310 1.0% 54 0.4% 256 1.6% Lower S. Kohala 3,100 10.0% 833 5.5% 2,267 14.2% Kawaihae 310 1.0% 165 1.1% 145 0.9% Waimea 3,100 10.0% 1,663 11.1% 1,437 9.0% Honokaa 1,860 6.0% 1,182 7.9% 678 4.3% Kohala 1,550 5.0% 999 6.6% 551 3.5% Total 31,000 100.0% 15,049 100.0% 15,951 100.0% Present GP Dwelling 1985 Net Scenario Units Percent Units Percent Change Percent Kailua South 7,843 25.3% 5,225 34.7% 2,618 16.4% Kailua North 8,649 27.9% 4,928 32.7% 3,721 23.3% Kukio 341 1.1% 54 0.4% 287 1.8% " Lower S. Kohala 6,045 19.5% 833 5.5% 5,212 32.7% Kawaihae 1,767 5.7% 165 1.1% 1,602 10.0% Waimea 2,T90 9.0% 1,663 11.1% 1,127 7.1% Honokaa 1,426 4.6% 1,182 7.9% 244 1.5% Kohala 2,139 6.9% 999 6.6% 1,140 7.1% Total 31,000 100.0% 15,049 100.0% 15,95: 100.0% Proposed GP Dwelling 1985 Net Scenario Units Percent Units Percent Change Percent Kailua South 5,270 17.0% 5,225 34.7% 45 0.3% _ Kailua North 8,060 26.0% 4,928 32.7% 3,132 19.6% Kukio 1,147 3.7% 54 0.4% 1,093 6.9% Lower S. Kohala 8,742 28.2% 833 5.5% 7,909 49.6% Kawaihae 2,697 8.7% 165 1.1% 2,532 15.9% ` Waimea 1,736 5.6% 1,663 11.1% 73 0.5% Honokaa 2,015 6.5% 1,182 7.9% 833 5.20 Kohala 1,333 4.3% 999 6.6% 334 2.1% Total 31,000 100.0% 15,049 100.0% 15,951 100.0% ~ -33- iL L L Table 6 (continued) Alternative Development Scenarios L Water Oriented Dwelling. 1985 Net L Dev Scenario ______Units Percent_____ Units Percent~_AChange Percent Kailua South~ 8,000 25 8% 5,22.5 34.7% 2,775 17.4% Kailua Nbrth 8,600 27.7% 4,928 32.7% 3,672 23.0% Kukio 100 0.3% 54 0.4% 46 0.3% Lower S.. Kohala 2,000 6.5% B33 5.5% 1,167 7.3% Kawaihae 300 1.0% 165 1.1% 135 0.8% Waimea 2,000 6.5% 1,663 11.1% 337 2.1% L Honokaa 5,000 16.1% 1,182 7.9% 3,818 23.9% Kohala 5,000 16.1% 999 6.6% 4,001 25.1% IL Total 31,000 100.0% 15,049 100.0% 15,951 100.0% ` Source: County of Hawaii Planning Department L L L L L 4 l L _~4_ l housing would have to be built in Lower South Kohala and Kawaihae while 40 percent would be built in Rona. The resulting pattern has e. a stronger orientation to the Lower South Kohala and Kawaihae areas. Alternative 3: Proposed General Plan (Figure 4c) The pattern resulting from the proposed General Plan further accentuates the role of the Lower South Kohala and Kawaihae areas ~ while down playing Kona and Waimea. The pattern would achieve near parity between Kona (43 percent) and Lower South Kohala and Kawaihae (47 percent). To do this, 65 percent of all new housing should have to be placed in the Kawaihae and Lower South Kohala areas. The r emergence of this pattern would likely entail a similar, though smaller, redistribution of the commercial and industrial support services away from the traditional service centers of Kailua and Waimea toward this new urban center. Alternative 4: Water Source Oriented Pattern (Figure 4d) The last alternative place development in those areas where water source development carries the lowest risk, subject to the ~ limitations imposed by the present General Plan. This distribution would place 16 percent of the total housing units in Kohala and Honokaa which would be near their number limit as seen in table 6. Kona would retain 52 percent of the housing units - roughly the same L in Alternative 2 while the Lower South Kohala, Kawaihae and Waimea L areas would be at lower levels. However, even under this scenario, an additional 1,100+ units would be called for in Lower South Kohala. L L -35 L [ To realize this pattern, one fourth of the new housing would have to be built in Kohala and another fourth in Honokaa. These levels are way above the recent trends but would be the least risky to implement in terms of water source development. L Water. Requirements The water demands for the housing alternatives presented above l have been figures using the Department of Water Supply standard of 600 gallons of water per unit per day. For the 16,000 new units required to make up the 31,000 unit housing stock projected . approximately 9.6 million gallons per day (MGD) will be required. Development on the the Big Island has most often been one of L subdividing the land with subsequent construction of single family f units by the individual owners and comparatively little "house and Ill lot" development. This is also true of multiple family residential development, i.e., the land developer and the building construction developer have often not been one and the same. This lag time i between lot development and housing construction places additional requirements on the water systems since a commitment to these undeveloped lots has to be made as they could be built upon at any time. In projecting the future requirements for water supplies, a variety of vacancy factors could be assumed. The implications of these variations are significant since a zero vacancy rate would require 9.6 MGD, a 25 percent vacancy rate would require 12.7 MGD, while a 33 percent vacancy rate would require 14.4 MGD. For the l I -36- l r r purpose of comparing the water requirements of the different r alternatives, a vacancy rate of 25 percent will be assumed. ( Water Requirements - Com arison of Alternatives Alternative 1: Trend Oriented Pattern. The water need for f housing in the first alternative is shown in table 7 and figures 5a r and 6a. The highest added demand will be in Rona (8.5 MGD) followed i by Lower South Kohala (1.8 MGD), Waimea (1.-1 MGD), and comparatively little in the richer water source areas of Kohala and Honokaa. As seen in table 8, the cost of developing the required water system will be tremendous. The cost includes well, transmission and storage costs only, no on-site water lines or facilities are listed r in the figures. The higher costs calculated per million gallons in Rona and Honokaa is due to the lower expected yield per well in Kona and the higher elevation expected in Honokaa. r Alternative 2: Present General Plan. This alternative shifts I housing water demand from Kona, Kohala, Honokaa to Kawaihae and r Lower South Kohala (see figures fb and 6b). Kona's demand declines ~ to an additional 5.1 MGD while the Kawaihae and Lower South Kohala r new housing water demand would amount to 5.4 MGD. Depending on the location of development at these demand levels, it is possible that C the North Kohala to South Kohala transmission line would be required to supply Kawaihae and Lower South Kohala with the housing water projected. Presently, the Department of water does not have any r further plans to drill added wells in lower South Kohala. The -37- f I i ~ O ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ N CaR C~ ~ ~ L i ~ N 3 ~ ~ a ~ ~ e am an cm ~ a a ga _ CC " ~ ~ ~ o ~ O C ~ Y 3 Cc ' Y G ~ / ei U 7 4 ~ ~ Y E vA O ip ~ C] N - OY ~ W ' a • $ ~ a 8 I~, r~ O io ~ m n ~ O j 0 n ~ 1 ~ 0 O V a ~ .L > I j~~ ~Cf ~ 3 Q w Y f j i I 6 I VN ~ m I > ~ - ~ ' i~ m N _ ~i= A~` ~ I - ; ~ ~ i 3_ y i a 2 ~ ~ ~ o 0 r 1 _ ~ z' ~ a a I 11~1111'~hlgll Illh'h'll 1 hl~l Iq I' h'~"4111"I ~'ll'l11~1111`11q~11 ~ w a~a J 0 ~ G ICI VIII 7. U ~ ~ ~ 2 a yr I I 11111 ' m° •Q lQ n L p1 x v ~ 3 ~ m a r ~ l0 ~I a~ ~ I ~ ~ a ~ m~ x a ~ p~ z' vm m a ~ ~ i Z m m Li ~ x~ < 1 x a ~ u m b 7 N ~ O _ C T. C -38- 1 J h- ` Table 7 Water Demand for Alternative Development Scenarios Additional Additional Water Water Demand at Different Trend Oriented Dwelling Required Vacancy Assumptions ` Scenario Units (MGD) 25% 33% 50% Kailua South 4,695 29.4% 2.82 3.75 4.23 5.63 Kailua North 5,922 3T.1% 3.55 4.73 5.33 7.11 Kukio 256 1.6% 0.15 0.20 0.23 0.31 Lower S. Kohala 2,26T 14.2% 1.36 1.8i 2.04 2.72 Kawaihae 145 0.9% 0.09 0.12 0.13 0.17 Waimea 1,-437 9.0% 0.86 1.15 1.29 1.72 Honokaa 678 4.3% 0.41 0.54 0.61 0.81 Kohala 551 3.5% 0.33 0.44 0.50 0.66 Total 15,951 100.0% 9.57 12.73 14.36 19.14 - Additional Additional Water Water Demand at Different Present GP Dwelling Required Vacancy Assumptions Scenario Units (MGD) 25% 33% 50% Kailua South 2,618 16.4% 1.57 2.09 2.36 3.14 Kailua North 3,721 23.3% 2.23 2.97 3.35 4.4'. Kukio 287 1.8% 0.17 0.23 0.26 0.34 Lower S. Kohala 5,212 32.7% 3.13 4.16 4.69 6.25 Kawaihae 1,602 10.0% 0.96 1.28 1.44 1.92 Waimea 1,127 7.1% 0.68 0.90 1.01 1.35 Honokaa 244 1.5% 0.15 0.19 0.22 0.29 Kohala 1,140 7.1% 0.6& 0.91 1.03 1.37 Total 15,951 100.0% 9.57 12.73 14.36 19.14 Additional Additional Water Water Demand at Different Proposed GP Dwelling Required Vacancy Assumptions Scenario Units (MGD) 25% 33% 50% ~ Kailua South 45 0.3% 0.03 0.04 0.04 0.05 ~ Kailua North 3,132 19.6% 1.88 2.50 2.82 3.7E K~icio 1,093 6.9% 0.66 0.87 0.98 _.3: Lower S. Kohala 7,909 49.6% 4.75 6.31 7.12 9.49 Kawaihae 2,532 15.9% 1.52 2.02 2.28 3 04 Waimea 73 0.5% 0.04 0.06 0.07 0.09 ?Iorcicaa 833 5.2% 0.50 0.66 0.75 1.00 ( gohala 334 2.1% 0.20 0.27 G.30 0.40 Total 15,951 100.0% 9.57 12.73 14.36 19.14 C -39- L i L r Table 7 (continued) ~ Water Demand for Alternative Development Scenarios L Additional Additional Water Water Demand at Different Water Oriented Dwelling Required Vacancy Assumptions Dev Scenario ---Units- --(MGD)------25~----33X------50AS---- Kailua South 2,775 17.4Ai 1.67 2.21 2.50 3.33 Kailua North 3,672 23.OA; 2.20 2.93 3.30 4.41 Kukio 46 0.3~ 0.03 0.04 0.04 0.06 Lower S. Kohala 1,167 7.3~ 0.70 0.93 1.05 1.40 Kawaihae 135 0.8~ 0.08 0.11 0.12 0.16 Waimea 337 2.SAi 0.20 0.27 0.30 '0.40 Honokaa 3,818 23.9A; 2.29 3.05 3.44 4.58 Kohala 4,001 25.1X 2.40 3.19 3.60 4.80 i Total 15,951 100.0 9.57 12.73 14.36 19.14 ` Source: County of Hawaii Planning Department I IM L L -40- L ~ a ~ rt+ Q ~ ~ ~ i~iilii C ~ 3 ~ V 3 V 1. ~ C ~ ~ y $ ~ ~ ~ # L ~ ` cv ~ ~ ~ aka ~ s s ~ ~ ~ a> V ~ ~ r ~ m W I O ~~~w(( O Y S M C ~ \y I O C Y' ~ CC CC a! ~ 4i ~ b O b O ~~pp pp { p tY YT p Q/ ~~oy tOY ~O O ~i c ~ ~ P ~ ~ ~ QU ~ ~ R3U ~ x C I ~ 9 3 I ~ ~ U~ ~3 I< y q°- L y ~3Q I'i ~x c~-a~d ~ ~ ~ _ a ! r Y i O ~ ~ ~ x' T'a ~ ~ ~ tl\\\\\\\1\1Y y _ > IDllYll1W m~ = c§ ~ ml I W f o x oga V/ ( a' u Y m 7 ~ L ~ of = sm ~ V c~ ~ _ a _ ~ t`dj f)j Al w » A $ 8 ° ~ ~ `fir ail ~ vs » " mom m a L -41- L i Table 8 Water Development Costs for Alternative Development Scenarios in millions of dollars Added Added Water C Additional Water Water System Trend Oriented Dwelling Required Demand Dev Cost Cost Scenario Units (MGD) @ 25% Vac per MGD @ 25% Vac L Kailua South 4,695 29.4% 2.82 3.75 S4.1T S15.64 Kailua North 5,922 37.1% 3.55 4.73 S5.54 S26.17 Kukio 256 1.6% 0.15 0.20 55.54 S1.13 Lower S. Kohala 2,267 14.2% 1.36 1.81 52.74 S4.96 Kawaihae 145 0.9% 0.09 0.12 52.74 50.32 Waimea 1,437 9.0% 0.86 1.15 S2.82 S3.23 Honokaa 678 4.3% 0.41 0.54 54.48 S2.43 Kohala 551 3.5% 0.33 0.44 S2.98 S1.31 Total 15,951 100.0% 9.57 12.73 S55.18 L Added Added Water Additional Water Water System Present GP Dwelling Required Demand Dev Cost Cost Scenario Units (MGD) @ 25% Vac per MGD 'a 25% Vac - Kailua South 2,618 16.4% 1.57 2.09 54.17 S8. 72 ~ Kailua North 3,721 23.3% 2.23 2.97 S5.54 516.44 Kukio 287 1.8% 0.17 0.23 S5.54 S1.27 Lower S. Kohala 5,212 32.7%. 3.13 4.16 S2.74 511.41 L Kawaihae 1,602 10.0% 0.96 1.28 S2.74 53.51 Waimea 1,127 7.1% 0.68 0.90 S2.82 S2.53 Honokaa 244 1.5% 0.15 0.19 S4.48 50.87 Kohala 1,140 7.1% 0.68 0.91 S2.98 S2.71 Tota~ 15,951 100.0% 9.57 12.73 S47.46 Added Added Water f Additional Water Water System IL P^oposed GP Dwelling Required Demand Dev Cost Cost Scenaric Units (MGD) ~ 25% Vac per MGD 25% Vac ~ -------------------------------------------------------------------V----- Kailua South 45 0.3% 0.03 0.04 54.1"' SC.15 Kailua North 3,'32 19.6% 1.80 2.5C S5.54 S'' S4 C Kui:io 1,093 6.9% 0.66 0.87 S5.54 S4:63 Lower S. Kohala 7,909 49.6% 4.75 6.31 52.74 S'7 3I Kawaihae 2,532 15.9% .5< 2.02 S2.74 S5.54 Waimea 73 0.5% 0.04 0.06 S2.82 SC._° Honokaa 833 5.2% 0.5C O.o"6 S4.48 S2.98 Kohala 334 2.1% 0.20 C.27 S2.96 SC.80 ` Total 15,951 100.0% 9.57 12.73 545.61 l ` -42- L Table 8 (continued) Water Development Coats for Alternative Development Scenarios in millions of dollars Added Added Water Additional Water Water System ~ Water Oriented Dwelling Required Demand Dev Cost Cost Dev Scenario Units (MGD) @ 25~ Vac per MGD @ 25~ Vac Kailua South 2,775 17.4% 1.67 2.21 $4.17 $9.24 ` Kailua North 3,672 23.0 -2.20 2.93 S5.54 $16.22 Kukio 46 0.3~ 0.03 0.04 $5.54 $0.20 Lower S. Kohala 1,167 7~.3~ 0.70 0.93 $2.74 $2.55 Kawaihae 135 0.8~ 0.08 0.11 $2.74 S0.30 - Waimea 337 2.1~ 0.20 0.27 $2.82 $0.76 Honokaa 3,818 23.9 2.29 3.05 S4.48 $13.66 Kohala 4,001 25.1 2.40 3.19 $2.98 S9.53 Total 15,951 100.0 9.57 12.73 $52.46 Source: County of Hawaii Planning Department County of Hawaii Department of Water Supply I I I L -43- f i ` Waikoloa Village area does appear to have a rich water source underlying it. Should most of the projected lower S. Rohala housing growth be directed there, it is possible that growth would be accommodated without North/South Rohala transmission lines. ` Alternative 3: Proposed General Plan. The shift toward the i arid regions of Lower South Rohala and Kawaihae is further L accentuated in this alternative resulting in 8.3 MGD needed for new housing there while the demand in Kona declines to 2.5 MGD and in the water rich areas of Kohala and Honokaa the demand declines to about 1.0 MGD (see figures Sc and 6c). For the attainment of this alternative, it is more likely that the development of the North ` Kohala to South Kohala transmission line and added source development in North Kohala will be required. The cost of this transmission system is not reflected in table 8. Current estimates ~ for the line and support facilities total $48 million. Alternative 4: Water Source Oriented Pattern. This pattern j would place the bulk of the water demand in Kona (5.1 MGD), Kohala ` (3 .2 MGD) and Honokaa (3.0 MGD). As indicated by the title, this places most of the additional housing water demand in those areas L where water source development carries the lowest risk (see figures Sd and 6d). Of the four alternatives those oriented to the South Kohala area are the lowest cost solutions if the cost assumptions are borne out. The present plans by the Department of Water Supply do not l -44- l ~ include any water development for the lower South Kohala area other than the North/South Kohala transmission system. All additional ~ water would have to be supplied by private systems, such as Waikoloa, or by the proposed North/South Kohala System. The North/South Kohala transmission line would change the water r development economics significantly if it is implemented due to the scale of the investment required and its effects in reducing the operating cost of the water system. The housing water demand figures cited do not include additional ¦Y water for hotels, commercial and industrial needs, nor for public ~ facilities such as schools and parks, and so the total water demand will be higher. Per capita consumption figures based on Department i ~ of Water Supply data are shown in table 9 and figures 7 and 8. The highest per capita water usage is in North Kona and South Kohala S ~ which have the bulk of the resort, commercial and industrial uses. It should be noted here that these figures do not include water r supplied by the Waikoloa Water Company which supplies Waikoloa M1 Village and the Waikoloa Beach Resort. If these figures were to be added, the calculation per capita consumption in the South Kohala I ~ and for the Northwest Hawaii region would be higher. The major trend in water usage is upward on a per capita basis and could rise from 330 gallons per day to 350 or 400 gallons per day. At 350 r gallons per day, the water usage of the 43,000 additional persons projected would be an additional 15.1 MGD. Capacity requirements ~ would be even higher due to the residential land vacancy factors ~ discussed previously. r -45- L - Water Usage per Capita 1986 Fig. 7 gals per day 800 500 ~ ~ I 400 ~ I ~ 300I I I 200 I I i 100 0 Hemakue N. KOhel9 S. KOhal9 N. Kone S. KOne ® County Sources Only Source: Planning Dept. County of Hewall Dept. of Wflter Supply County of Hewall . Water Usage per Capita ' Fig. 8 8C0 gals per day SCC~, yJO ~ 300 200 '98G ',981 "982 1983 1984 "985 '986 L + N. Kona S. '<oneta ~ "ema/N.KOh/S.KOn ave Source: Planning Dept. County of Hewall L Dept. of Water Supply County of Hewall Based on the above analysis, the following conclusions result: 1) A minimum of 1.0 MGD of water source capacity should be developed in the Northwest Hawaii region every year. This minimum should be exceeded on a regular basis so that water sources do not become continuing constraints on housing development.. 2) From a water supply standpoint, urban development in the ~ Kohala and Honokaa areas should be encouraged. 3) The feasibility of the North Kohala to South Kohala ~ transmission line from a financial standpoint should be carefully evaluated. This feasibility consideration-could r well be key to the scale of development possible in Lower k South Kohala and Rawaihae. 4) Application of other water supply techniques, such as desalinization, could change the water outlook drastically. Like the North Kohala to South Kohala transmission line, the financial feasibility of these ~ technologies needs to be explored. I~ ` Solid Waste Requirements Solid waste generation has been calculated at 15 pounds per household per day resulting in a total additional solid waste l generation of 240,000 pounds (120 tons) per day for the 16,000 additional housing units assessed in the scenarios. The solid waste 1 disposal system consists of transfer stations with trailers, and { landfill sites. The Kailua landfill serves all of Northwest Hawaii and is expected to be relocated soon, the alternative development -48- 1 r Table 10 Solid Waste Transfer Facilities for Alternative Development Scenarios r Added Solid Added New Trend Oriented Dwelling Waste Transfer Added Land Total r Scenario Units (lbs) Stations Chutes Fill Costs Kailua South 4,695 70,425 1 2 0 $800,000 ~ Kailua North 5,922 88,830 0 3 0 $600,000 Kukio 256 3,840 0 0 1 $5,000,000 Lower S. Kohala 2,267 34,005 1 1 0 $600,000 Kawaihae 145 2,175 0 0 0 $0 r' Waimea 1,437 21,555 0 1 0 $200,000 Honokaa 678 10,170 0 0 0 SO Kohala 551 8,265 0 0 0 $0 V Total 15,951 239,265 2 7 1 $7,200,000 Added Dwelling Added New 1d Present GP Dwelling Solid WasTransfer Added Land Total Scenario Units (lbs) Stations Chutes Fill Costs ~ Kailua South 2,618 39,270 1 1 0 $600,000 Kailua North 3,721 55,815 0 2 0 $400,000 Kukio 287 4,305 0 0 1 $5,000,000 rr Lower S. Kohala 5,212 78,180 1 2 0 $800,000 Kawaihae 1,602 24,030 1 0 0 $400,000 Waimea 1,127 16,905 0 1 0 $200,000 Honokaa 244 3,660 0 0 0 $0 b Kohala 1,140 17,100 1 0 0 S400,000 Total 15,951 239,265 4 6 i 57,800,000 Added Dwelling Added New Proposed GP Dwelling Solid WasTransfer Added Land Total ' Scenario Units (lbs) Stations Chutes Fill Costs Kailua South 45 675 0 0 0 SO Kailua North 3,132 46,980 0 2 0 $400,000 ` Kukio 1,093 16,395 0 0 1 $5,000,OOC Lower S. Kohala 7,909 118,635 _ 3 0 S~,000,000 Kawaihae 2,532 37,980 1 0 S600,000 ` Waimea 73 1,095 0 0 0 SO Honokaa 833 12,495 0 0 0 SO Kohala 334 5,010 0 0 0 SO I. Total 15,951 239,265 2 6 S7,000,OOC L -50- L i G ` Table SO (continued) Solid Waste Transfer Facilities for Alternative Development Scenarios L Added Dwelling Added New Water Oriented Dwelling Solid WaeTransfer Added Land Total Scenario Units (lbs) Stations Chutes Fill Costs Kailua South 2,775 41,625 1 1 0 S600,000 Kailua North 3,672 55,080 0 2 0 5400,000 Kukio 46 690 0 0 1 55,000,000 Lower S. Kohala 1,167 17,505 0 1 0 5200,000 Kawaihae 135 2,025 0 0 0 SO Waimea 337 5,055 0 0 0 SO Honokaa 3,818 57,270 0 2 0 S400,000 Kohala 4,001 60,015 1 1 0 $600,000 L Total 15,951 239,265 2 7 1 57,200,000 f Source: County of Hawaii Planning Department County of Hawaii Department of Public Works L L L L L -51- l L L L Table 11 l Public Sewage Treatment Plants Cost in Millions of dollars (19885) L Area --------Sewage Treatment Plant------Cost (1.988$)--- Area-Total-- I Kailua South Kealakekua (2000-2015) 539.5 539.5 L Kailua.North Kealakehe S25.0 Kailua (1995-2000) 516.0 1 Keauhou (1995-2000) S3.2 S44.2 L Kukio None Lower S. Kohala Puako (1990-2010) 59.1 -59.1 Kawaihae Kawaihae S16.9 S16.9 L Waimea Waimea (1990-2010) S28.5 528.5 Honokaa Honokaa (1991-2010) 526.5 S26.5 Kohala None L Totals 5164.7 l Source: County of Hawaii Planning Department I County of Hawaii Department of Public Works L l l -sz~- airport to replace the Kailua plant and to provide additional service.. Other County run plants are being planned at this time are reflected in Table 11. Private plants are in place at the Mauna Kea Resort, Mauna Lani Resort, and at Waikoloa Village and Waikoloa Beach Resort and at several condominium sites. Additional private plants are anticipated as multiple family and resort projects are completed. r The new Kealakehe STP and related improvements proposed would total approximately $25 million based on current estimates. Should the development of STP's become a standard requirement, the location of the plants and their cost will become major variables in land use decisions. Park Requirements The park requirements are based on an assessment of the future needs in relation to existing facilities as shown on table 12. The w park requirements include neighborhood parks with ballfields, courts and restroom facilities, community parks with the same facilities and community centers, district parks with gymnasiums, and regional parks with major spectator facilities. Additionally, a regional golf course is assumed for Kona while four new beach parks are also included. The total park costs are heavily influenced by regional i L facilities - golf course, regional sports complex and beach parks 4 which comprise $34.0 million. L The parks serving the surrounding community amount to $15.7 to $31.4 million with the highest cost being for the alternatives which place a lot of emphasis on lower South Kohala while the lowest cost L L -53- Table 12 Recreation Facilities Needed Under Alternative Development Scenarios Trend Oriented Dwelling Costs Scenario Units Neigh Comm Dist Beach Other (SiM) Kailua South 9,920 2 $1.4 Kailua North 10,850 1 1 Reg/Golf S41.5 ~ Kukio 310 2 $1.0 ` Lower S. Kohala 3,100 1 1 1 $6.5 Kawaihae 310 $0.0 ~ Waimea 3,100 1 $5.3 ~ Honokaa 1,860 $0.0 Kohala 1,550 $0.0 ~ Total 31,000 3 2 1 4 $55.7 Present GP Dwelling Costs Scenario Units Neigh- Comm Dist Beach Other (S1M) Kailua South 7,843 2 $1.4 ~ Kailua North 8,649 1 1 Reg/Golf 541.5 Kukio 341 2 $1.0 Lower S. Kohala 6,045 2 1 1 $7.2 ~ Kawaihae 1,767 1 S5.3 ~ Waimea 2,790 1 S5.3 Honokaa 1,426 50.0 4 Kohala 2,139 S0.0 Total 31,000 4 3 1 4 $61.7 Proposed GP Dwelling Costs Scenario Units Neigh Comm Dist Beach ----Other-----(SSM)- Kailua South 5,270 1 S0.7 Kailua North 8,060 1 1 Reg/Golf S41.5 Kukio 1,147 2 51.0 Lower S. Kohala 8,742 3 1 1 ~ $16.9 Kawaihae 2,697 ~ 55.3 L Waimea 1,736 50.0 Honokaa 2,015 50.0 Kohala ',333 S0.0 f Total 31,000 4 2 2 4 565.4 -54- l i i i Table 12 (continued) Recreation Facilities Needed Under Alternative Development Scenarios Water Oriented Dwelling Costs ~ Dev Scenario Units Neigh Comm Dist Beach Other (S1M) Kailua South 8,000 2 S1.4 Kailua North 8,600 1 1 Reg/Golf 541.5 ~ Kukio 100 2 51.0 Lower S. Kohala 2,000 1 1 S5.8 Kawaihae 300 50.0 ~ Waimea 2,000 50.0 ~ Honokaa 5,000 50.0 Kohala 5,000 S0.0 Total 31,000 2 1 1 4 S49.T L ~ Costs (excluding land costs) Neighborhood $0.7 Community 55.3 L District $9.0 Regional Parks 325.0 I Beach Parks 50.5 IL Golf Course ST.O L Source: County of Hawaii Planning Department County of Hawaii Department of Parks and Recreation L L L L -55- L ~ Alternative Development Scenario i Fig. 9 -Recreational Cost Summary millions of dollars $70 $80 $50 ii~~~ll1~~' ~ $40 ~'~'llii li i yllililiiihi ilil ui 1 L $30 I $20 $10 I $0 Trend PreS9nt ProgOS6d W8t6r Dev. f Source: Planning Dept. County of Hawaii I l -56- I - alternative are those oriented toward North Kohala and Honokaa development. The difference in cost estimates is directly related to the presence of existing communities and recreational facilities (see figure 9). Road Requirements The projected population levels will have major impact on the road system in West Hawaii. Due to the nature of traffic, the road - requirements for the major elements of the road system will not be localized but rather the impacts of traffic will be regional in scope. While internal roads within a development will be required and will involve substantial investments, it is the major inter--area roads that are of particular interest since these major roads form the basic structure of the road system in Northwest Hawaii. A recent traffic study submitted with an environmental impact statement analysed the road system as shown in figure 10. The study assumed that regional growth in traffic will continue and that growth from six projects will be added. The projects assumed to occur are: Cumulative Additional Development ` Project 1993 1998 S. Kohala Resort 350 hotel units 350 hotel units 15 single family 110 single family 450 multi-family Ritz Carlton 450 hotel units 650 hotel units Hyatt 1260 hotel units 1260 hotel units Hotel X 500 hotel units 500 hotel units Kohala Estates 47 single family 47 single family Kohala Ranch 1300 single family 2265 single family 360 multi-family 390 multi-family -57- w AT cA1~AClTx AT GAPAGITy AT CAPACITY AT C.APAGlTY UNbE1~ CAI°AClTY UNDER CAPACITY AT GA!°AG1TY AT CApAGtT`t Figure 10 oven CA1°AGITY 120A17 CONDIT10N5 OVL`R CAPAC1Ty LE96ND (993 ROAD GONDlT10NS I°~98 120AD COlJi~lTlONS ` Sources South Kohalo Reaor~ CiS -58- The results of that analysis showed that the Queen Kaahumanu Highway from Kawaihae to Palani Road, and the Waimea to Kawaihae - Road will be at or above the capacity levels by 1993. This type of growth is expected to occur since most of the listed resort projects have already been approved while the single family and multi-family projects are less than the total ,expected to be built in the region J regardless of whether Kohala Ranch is developed or not. In addition to the analysis presented in the recent EIS's there - is a need for further traffic and road capacity analysis. One such effort is being undertaken through the State and County joint transportation planning process. It is anticipated that the results of this effort will provide a comprehensive in-depth analysis of the future traffic loads and the improvements required. Projections such as these are a clear indication that additional - road capacity will required. Based on these assessments and other planning documents a listing of the major new road requirements is found on table 13. This listing of major area-wide improvements does not include the millions of dollars that will have to be spent on on-site road improvements by the developers or smaller scale - improvements to the existing roads such as channelization and - pavement widening for roads. From a regional perspective there is little variation in the amounts that will have to be spent in the long run by different development patterns since most of the traffic effects being considered at this time are regionwide effects. However, the - development of specific properties or areas will accelerate the need -59- i 1 Table 13 - Major Road Improvement Requirements in'millions of dollars ~ Road Facilities Costs Kailua South Old Mamalahoa Highway Improvements 53.7 J Alii Highway S10.0 Total S13.7 Kailua North New Arterial S12.0 _ Palani Road Realignment S6.0 QK Expansion - Keahole to Palani S10.0 Total 528.0 Kukio Lower S. Kohala North-South Connector S4.0 QK Expansion - Kawaihae to Keahole 518.5 Total 522.5 Kawaihae Akoni Pule Highway Extension S6.0 Waimea to Kawaihae Road S29.0 Total 535.0 - Waimea Waimea By-Pass 511.0 Total S11.0 _ Honokaa Kohala Total S110.2 Source: County of Hawaii Planning Department County of Hawaii Department of Public Works State of Hawaii Department of Transportation _ -60- - for improvements most directly related to those locales. For example, the development of the Kohala Ranch project at the North - and South Kohala district boundary will accelerate the need for the Akoni Pule Highway extension as contrasted with other development patterns that would place more development in Railua. - Drainage Requirements The major drainage problems in West Hawaii are in Kona in the area south of Palani Road. While Honokaa, Rohala, Waimea, and Puako have localized flood control needs the Rona area is by far the most - severely affected, and the most in need of drainage improvements. - The preliminary design of the improvements has already been done and rough cost estimates are available as shown in Table 14. As seen in - that table the bulk of the costs are in the three major flood plains of waiaha, Holualoa and Kaumalumalu between Kailua and Keauhou. Summary of Major Infrastructure Development Costs The total costs of developing the major infrastructural elements - are summarized in Table 15 and figures 11a to lld. The total figures far the four alternative scenarios are about $450 million each. This total is the amount that would be required to support the doubling of the Northwest Hawaii resident population and an ` additional 16,000 housing units in the region for a total of 31,000 housing units. On an average basis this amounts to $28,000 of major infrastructural cost per dwelling unit. This does not include on-site roads, water, drainage costs, nor school, hospital or public service agency costs. ti -61- _ Table 14 Drainage Improvement Costs Drainage- Up to Alii Alii Hwy QK to Above - Basin Highway To QK Mamalahoa Mamalahoa Total Holualoa $3.4 $2.9 $3.8 $10.1 Waiaha 510.9 36.5 $13.6 S1.8 $32.8 Kaumalumalu 54.5 $2.3 $2.5 $0.7 S10.0 Keopu S1.2 S1.2 Sub-Total $18.8 $12.9 $19.9 S2.5 S54.1 Waimea S1.0 Source: County of Hawaii Planning Department County of Hawaii Department of Public Works i l -62- f f Among the infrastructure costs included the largest share is in L public sewer systems, followed distantly by roads, then water systems, drainage, and parks, all of which are roughly equal to each other, and then by solid waste disposal which comprise a comparatively small proportion of the total costs. f Remarkably there is little difference in the overall total amongst the various alternatives. Given the large scale shifts in urbanization it would be reasonable to expect some difference in f total costs. The stability of costs across the alternatives is due, L in part, to the assumption that the drainage, road, landfill, and regional recreational facility costs would be constant regardless of l the development pattern. These common costs total $223.8 million or about 75 percent of the total costs. Of the common cost items one which will bear future analysis is the road costs. As discussed previously, the road costs are held constant as eventually all of the road improvements being considered will have to be made regardless of the development pattern. However, on-going analysis may show the need for additional improvements not yet listed which could alter the balance of improvement costs. r Looking at the costs associated with the alternatives the I differences among them are largely in the water system and park costs. In the alternatives which place a greater share of the growth in lower South Kohala it is assumed that the water development costs there would be lower than in the Kona or Honokaa areas. This would likely remain true to the extent that adequate l -63- 1 ground water can be found in the area. Should the ground water become scarcer than expected or more costly to develop then the cost savings expected may not materialize. The primary alternative to _ ground water resources in this area under consideration at this time is the proposed North-South Rohala transmission line which carries an approximate capital cost of $48 million. Clearly, an improvement of that scale could alter the cost equations drastically as it is almost equal to the entire water system cost assumed for Northwest Hawaii. r r r r w r r -64- r y Table 15 Summary of Major Infrastructural Costs for Alternative Development Scenarios Trend Oriented Dwelling Unit Water Solid Public Major Percent Scenario Units Dist Cost Waste Sewers Drainage Reads Parks Total_______ Dist__ Kailua South 9,920 32.0$ 515.6 50.8 539.5 552.9 S13.T $1.d 5123.9 27. i$ _ Kailua North 10,850 35.0$ $2fi.2 $0.6 544.2 51.2 528.0 541.5 5141.7 31.6$ Kukio 310 1.0$ ~1.1 55.0 50.0 f0.0 50.0 51.0 37.1 '.S$ Lower 5. Kohala 3,100 10.0$ 5.0 50.6 39.1 50.0 522.5 56.5 543.7 9.1$ Kawaihae 310 1.0$ 0.3 ~0.0 ;16.9 50.0 535.0 50.0 552.2 11.1$ Waimea 3,100 10.0$ 3.2 0.2 528.5 1.0 511.0 55.3 549.2 11.0$ Kohalaa 1,550 5.0$ 51.3 ;0.0 SS0.0 $D.D =0.0 50.0 Sf5.3 0.3$ Total 31,000 100.0$ f52:3$ 51.8$ 5136.8$ 52.3$ 5124.6$ 552.4$ 5100.0$ 100.0$ Percentage Present GP Dwelling Unit Water Solid Public Major Percent - Scenario Units Dist Cost Waste Sewers Drainage Roads Parks Total Dist_ Kailua Sauth 1,8d3 25.3$ 58.1 50.6 f39.S E52.9 513.7 51.4 S11fi.8 26.1$ Kailua North 8,649 27.9$ 516.4 $0.4 544.2 51.2 526.0 f41.5 5131.7 29.°$ Kukio 341 1.1$ ;1.3 $5.0 50.0 50.0 $0.0 51.0 E7.3 1.6$ Lower S. Kohala 5,045 19.5$ 511.4 50.8 $9.1 f0.0 522.5 $7.2 551.0 " .4$ Kawaihae 1,761 S. T$ ;3.5 50.4 516.9 50.0 535.0 f5.3 $61.1 ~D.9$ 'Aaimea 2,190 9.0$ 52.5 50.2 526.5 51.0 511.0 f5.3 548.5 Honokaa 1,426 4.6$ 50.9 $0.0 526.5 f0.0 50.0 50.0 527.4 6.1$ Kohala 2,139 6.9$ 52.7 E0.4 $0.0 E0.0 50.0 f0.0 33.1 0.7$ Total 31,000 100.0$ E47.5 57.8 $164.7 555.1 5110.2 E61.7 E447.0 iCC.C$ Percentage 10.5$ 1.1$ 36.8$ 12.3$ 24.7$ 13.3$ '00.0$ Proposed GP Dwelling Unit Water Solid Public Major Percent Scenario Units Oist Cast Waste Sewers Drainage Roads Parks Total 0is- Kailua South 5,210 17.0$ 50.2 50.0 539.5 552.9 $13.T 30.1 5107.0 23.9$ Kailua North 8,060 26.0$ 513.8 fD.4 Sbd.2 51.2 528.0 541.5 5129.1 28.8$ Kukio ',147 3.7$ f4.6 55.0 50.0 $0.0 $0.0 51.0 $1D.9 2.1$ Lower S. Kohala 8,742 28.2$ 517.3 51.0 E9.1 ED.D $22.5 $16.9 566.8 'd .3$ Kawaihae 2,097 3.7$ $5.5 $D.S 316.9 $0.0 $35.0 35.3 563.3 'd.'a Waimea 1,736 S. 6$ $C .2 f0.0 $28.5 $1.0 $11.0 EO.C $40.7 ~.;i - 4onokaa 2,015 S.S$ 33.0 50.0 326.5 $0.0 E0.0 30.0 i29.S Kohala ','33 C.3$ $0.8 $0.9 30.9 E0.0 SC.C SD. 30.Z -oral :1,000 100.9$ S45.S 37.3 Sl6d.' 355.'. 51:0.; >65.C 34"_9.J .'o Percentage 10.2$ 1.S$ 36.3$ 12.3$ .C.S$ C.S~ Hater Orienteb Dwelling Unit 'dater °olid Dublic Major ~ercen_ Scenaric Units Dist Cost _Waste Sewers__Drainage____ Roads_ _ ?arks Tota~, ` -J dailua South B, 000 25.8$ $9.' 50.5 $39." $52.9 $ ~.7 x " 26..`. ~ai'ua 'forth 3,500 21 $16.2 30.'! 544.2 31.2 38.0 3 3"' Kukio 100 0.3$ ;0.2 $5.. $0 iC.C SC.C 8'~.C 36.2 =y _ower Koha'ia 2,000 6.5$ E2.6 3C.: 39. SD.J 32..5 55.3 340.2 - Kawaihae 'OC 1.C$ E0.3 $0. 315.9 SC 335 SC. S52.C 'Aaimea ^OD 6.5$ 50.3 S0.. 329.5 3~.J 31,~C ~C.' 541.: Honokaa 0 ',6.',; 3'3 ' SC.C 826.2 30.C 30.: 30 3d0.6 (orals 6.'$ 59.. i0.~ 50.3 iO.J i0., SC.. 5,~. ,JOC 'C0.3$ SSr 5 S7. 5164. 3SS.' $1'0.2 3C9 3439._ 00.," ?ercentage '.3$ 6$ i7.5; '2.S$ 25. C$ ,D.J$ Source: See 'ables 3, 11, ~ '3, and td ror sources -65- i - r- r-- f r f I I I I 1 1 1 t I I 1 L Trend Oriented Scenario Present GP Pattern Scenario Fig. 11a -Infrastructure Cost Summary Fig. 11b -Infrastructure Cost Summary ' mllllons of tlollera mllllore of tlollers $200 $160. _ $160 $100 5100 $60 $60 ~ ~ Water 9.Weata Sewers Orelnege Hlghweye Parka Water 9.Wasta Sewers fkalnege Hlghweye Parka Source: Plemlrp DeDI. County of Howell Source: Plemina Dapl. Ccunly DI Mpwell tT 1 Proposed GP Pattern Scenario Water Qrien~ad Scenario Fig 11c -Infrastructure Cost Summary Fig. 11d -Infrastructure Cost Summary mllllons al tlollers mllllons of tlOllare $200 5200 $160. - 5160 $100 5100 $60 - - $60 $D - - $0 Water 9.Weste Sewers prelnege Hlghweye Perks Water 9.Weste Sowers fNalnage Hlghwey9 Parka Source: Plenning Depl. Cwnty of Hewnll Source: Plemina Dept County of Howell MAJOR FINDINGS AND CONCLUSIONS 1) The costs of the major infrastructure elements reviewed are projected to be $450 million in infrastructure to support the _ 16,000 additional units in the next 7-17 years means the need i for an investment of $26 million to $64 million per year. i 2) Given this scale of costs a comprehensive financing strategy must be developed and agreed upon. There will be no single source of revenue. or financing that will resolve all of the capital improvement requirements. While this task will not be an easy one, a clear strategy needs to be formulated embracing ~ the known and projected revenue sources, major operating and capital costs, and a review of the alternative means of financing the required investment. Once the strategy is agreed r upon implementation through the permitting and budgetary process i can commence. L 3) Cooperation between the State and County governments will be necessary in view of the joint responsibility for developing L infrastructure. In addition to joint responsibility both the state and county have unique revenue sources which could be brought to bear on the problems at hand. 4) Private development of infrastructural systems will help to relieve the pressure on public systems and should be L encouraged. However, infrastructure is only one factor, albeit a major factor, in land use considerations and therefore should L not be viewed as an automatic approval criteria. L 5) A study of the economic feasibility of the proposed North Kohala to South Kohala transmission line needs to be undertaken before L -67- L J ~ any decisions on this matter are made. Its potential J implications for infrastructure service, costs, and land use are large. The economics of such a large project needs to be clearly spelled out before any go/no-go decisions are reached including a recognition of the operating cost savings as well as J the required capital expenditure. J 6) There is a need to begin infrastructure investment as soon as possible. While the need for thoughtful action is always J present it is imperative that such action be implemented quickly. Should the required level of investment not be made and the expected economic and population growth becomes a reality there could be housing shortages and price 'increases, J traffic congestion, and shortages of recreational facilities. 7) All of the alternatives presented presume that there will be additional growth in Rona since it already is the largest urban area in Northwest Hawaii and possess many of the required .r improvements for future growth. It is important that I y development planning for infrastructure and land use be completed soon so that the public and privately held lands in I Kona can be developed. i i` -68- L ~ • • 7 TABLE OF CONTENTS ~ ~ COUNTY OF HAWAII INFRASTRUCTURE FINANCING ANALYSIS AND PLAN Prepared by Sutro & Co. Incorporated I. Introduction A Exective Summary B. Some Basic Issues R. Financing Mechanisms A. Development Fees 1. Introduction 2. Road Fees 3. Sewer Fees 4. Water Fees 5. Drainage 6. Other Infrastructure 7. Summary B. Improvement Districts 1. Introduction 2. Application In Hawau 4. Legal Considerations 3. Federal Tax Considerations C. General Obligation Bonds 1, Introduction 2. Outstanding Debt 3. Credit Summary 4. Limitations 5. Projected General Obligation Debt Capacity Hawaii 5/11/89 t • • D. Project Revenue Bonds 1. Introduction 2. Project Revenue Bonds a) Solid Waste b) Sewer c) Water 3. Special Revenue Bonds a) Highway Fund b) Tax Increment E. Reimbursement Agreements F. Pay-As-You-Go III. Summary of Infrastructure Needs A. By Type 1. Water 2. Sewer 3. Roads 4. General Administration 5. Fire B. By Judicial District 1. Puna 2. North Hilo 3. South Hilo 4. Hanakua 5. North Kohala 6. South Kohala 7. North Kona 8. South Kona 9 Ka'u [IV. Applicability of Financing Mechanism to Infrastructure Need by Judicial District) 1. Puna 2. North Hilo 3. South Hilo 4. Hanakua 5. North Kohala 6. South Kohala 7, North Kona 8. South Kona 9 Ka'u V. Kahole to Kailua Development Plan Hawaii 5/11/89 • I. Introduction The preparation of a comprehensive financing analysis and plan for the County of Hawaii has been a most challenging and interesting assigrunent. The infrastructure needs of the Island are tremendous, indeed overwhelming. Lack of funds, extensive development, past neglect or financial inability compound the problems, Added to these problems is sheer size and diversity of the Island. .A' In allocating scarce financial resources f ~ 'rl ras a there are certain basic rules, which while superficially self evident arc ifficu to implement, given the realities of politics, policy making and th al lac ~ blic awareness as to the cost of infrastructure. ~g=~ ~y First, exhaust alI intergov ing opportunities. More specifically, this K~..\ would mean the State ofth~-~~deral government. In the past decade, we have witnessed a dramatic dec t~~' availability of intergovernment transfers, particularly with respect to the Federal g rnment. Given the size of the Federal deficit, this condition is likely to persist for the foreseeable future, Indeed, local government should approach all infrastructure needs on a worst case basis which assumes there will be no intergovernment transfers. Secondly, the Island should look for growth to pay for the facilities needed to accommodate growth. Thus the distinction between infrastructure needs with are necessary to upgrade, replace and repair existing facilities and generally serve the existing Hawaii S/11/$9 1 • population and those which are development driven must always be considered. The line between the two is seldom bright, rather it is almost always gray. Nevertheless, the distinction is critical in that the Island's has limited resources to pay for projected infrastructure needs. Another related distinction is the difference between "in-fill" development and larger, more intensive, large scale development projects, On Hawaii, the latter will most always be resort oriented, and, for the most part appears to be concentrated in West Hawaii. As a practical matter, it should be relatively easier to have growth pay for growth for the latter type of development because the proposed uses (resort, commercial) generate the necessary cash flow. The infrastructure needs for in-fill development will be more difficult to quantify and provide payment for only from developers. Thirdly, all upgrades, replacements and major repairs that can be paid for from use fees should be. On Hawaii, this could mean water, solid waste and sewer systems. Finally, the County should consider funding only those infrastructure needs from general obligation and tax revenue monies that cannot equitably be funded from other parties. These monies are literally the County's last Line of defense and should be allocated sparingly and only after all alternative funding has been exhausted. Hawaii 5/11/89 2 B, Some Basic Issues In terms of financing infrastructure, the basic issue is one of "who pays, and when". One of the basic conclusions of this analysis is that the County's limited resources are going to be so overwhelmed with "catch-up" infrastructure maintenance, upgrades and replacements that it cannot afford to finance or carry the costs of infrastructure for development. Growth must pay for growth because there is no realistic alternative. Furthermore, it has been our experience and is a practically universal truth that the mere increase in the property tax revenue from new development will not, alone, fund both the infrastructure needed for that development and the provision of basic public safety services. The "County Fiscal Impact Analysis -Hawaiian Riviera Resort" confirms the truth of this statement on the Island of Hawaii. • One of the most difficult issues confronting local government in implementing a policy of growth paying for growth involves the timing and method of payment for large-scale public works projects. A good example is the construction of a major highway interchange. Often, the first development in a given area will not require the construction of an interchange but will benefit. However, subsequent and anticipated development will eventually necessitate the construction of an interchange. Local government has basically three choices. • 1. A]low the first development to proceed without the interchange. From a public policy viewpoint this alternative is unacceptable. The Hawaii I-B 5/11/89 1 local agency will always be playing "catch-up" with the needs of the community. The result will be traffic congestion. 2. Charge all the property owners who will benefit for the cost of the interchange, There are problems with this arrangement. In particular, it is difficult to persuade the outlying landowners, who while receiving a direct benefit, may not want to develop for several years, to go along with paying something like a special assessment during the years until they are ready to develop. If they are unwilling, they can generally stop the use of any charge. And yet it is unfair that these outlying landowners should be able to gain the substantial financial and other benefits of the interchange, while contributing little, if anything, to the construction cost. 3. Charge the first developer the full cost and provide a mechanism whereby other property owners reimburse the first developer for their pro rata share. Note how the risk of future development will shift to the first developer. 4. The local agency can advance the necessary funds to construct the interchange and provide a mechanism (typically Development Fees} to reimburse itself from future development. Under this option, the local agency has assumed the risk of future development. This problem is not unique to freeway interchanges, but occur also with schools, flood control works, sewage treatment plants, and other major public works. Hawau I-B 5/11/89 2 • Another good example occurs when an agency needs to construct a sewer treatment plant. Due to economies of scale and the desirability of orderly development, construction of the plant with excess capacity beyond current needs, makes a great deal of sense. The cost of the excess capacity can become the basis for the Deve]opment Fee charged to all new customers. However, the question remains -who initially pays for the excess capacity and who bears the risk of development not occumng? Thus, throughout this report, the reader should keep in mind the problem of when and how to finance the construction of additional or excess capacity necessary to accommodate future growth. Hawaii I-B 5/11/89 3 • II. Financing Mechanisms This section provides a general overview of the different mechanisms for infrastructure financing available to the County. It is important to stress that they are not always alternatives to each other, and the County need only pick one and reject the others. Rather, they are potential components of a comprehensive infrastructure financing approach. An effective, comprehensive infrastruc : plan will combine elements of most s,'' ; . or even all of these mechanisms, In the follo n, for each mechanism, there will be generalized discussion, followed by an si of app that particular mechanism on a. the Island of Hawaii, with due regard to the a and individual characteristics of the o~~ Island. • .,ti~.~ k~?j {i r t i~ 'f`r:. ..1 ~'i; ~~'i _3*: v. '.w! Hawaii II 5/11/89 1 • A. Development Fees I. Introduction. Development fees are one method, by which local government can shift the cost of providing infrastructure away from local government to the new development itself. Development Fees are on integral part of an overall infrastructure finance plan. There are, however, limitations. First, revenue is produced only to the extent there is development. Second, by collecting a fee, the County puts itself under an obligation to provide the service. Third, the amount of the fee may be limited by market forces. The terms "development fees" and "impact fees" have been loosely used to cover a broad range of charges and fees imposed upon developers for both the cost of infrastructure facilities directly serving their development and the overall impact of the particular development upon existing infrastructure systems. It is very important to stress that Development Fees can only be spent to provide infrastructure facilities necessary to serve new development. Specifically, new development can be charged for (i) the full cost of facilities that serve it exclusively and (ii) a pro-rata share of the costs of facilities that serve both new development and other users. Development Fees cannot be used to upgrade facilities for existing residents, nor may they be used to maintain facilities. As mentioned above, Development Fees can provide for the full cost of facilities that serve it exclusively or a pro-rata share of non-exclusive facilities. The distinction between exclusive and non-exclusive facilities is I-Iawaii II-A 5/11/89 1 • critical. With respect to our discussion and recommendations with respect to Development Fees, we are concerned with the latter situation. We are able to concern ourselves with fees for non-exclusive uses by making an important assumption with respect to infrastructure for the exclusive use of a particular development. Facilities that exclusively serve a particular development will be paid for by that development. For example, an access road, subdivision improvements, water and sewer connector lines, even a entire sewer plant can be exclusive facilities. Therefore, our use of the term Development Fee is synonymous with the term "impact fee" and is based upon the concept of development paying to compensate for his development's "impact" on the rest of a particular infrastructure system. A good example is a sewer plant with excess capacity. As each user connects to the system, an impact fee must be paid. The impact fee compensates the public entity for the capital costs it incurred in constructing the excess capacity. In some situations, where the first developer may have paid for facilities capable of providing services in excess of that development's actual needs, the impact fee compensates the developer to the extent they have financed facilities which subsequent development is able to utilize. This distinction is necessary not only to encourage a logical and systemic approach to raising infrastructure capital, but will help with the realities of growth on the Island of Hawaii. Most of the development, particularly on the west side, is either of a major resort nature, or a large, Hawaii R-A S/11/89 • planned mixed-use development. Much of these developments will, in order to proceed, find it necessary to construct new infrastructure systems rather than merely connect to existing ones. Contrast this situation with the "in-fill" or smaller scale development taking place on the rest of the Island. From a legal standpoint, the discussion in the rest of this section is based on the "rational nexus" criterion, the current standard of review established by the courts in most states with respect to the imposition of Development Fees. The rational nexus standard assumes that established residents have no responsibility for facilities for new residents, even though established residents had much of their infrastructure financed for them by previous generations. In order to appreciate the true issues confronting the Island in developing an effective and equitable system of Development Fees, one should consider the historic source and evolution of Development Fees. Traditionafiy, Development Fees are established and charged on a municipal level. Occasionally, they are charged by county in large, urban counties such as Los Angeles or Broward County, Florida. However, the common element is that the charger of the fee typically has a single integrated utility system for each public service, i.e. one sewer system, one water system. Thus, uniform Development Fees are not only possible, but logical. The size of the Island makes the situation on Hawaii the opposite. The diversity, ranging from existing agricultural-rural to existing and proposed high density resort and mixed uses also contributes to the complexity of the Development Fee process. Hawaii resembles a small state Hawaii II-A 5/11/89 3 . . much more than it is resembles a large city or even a large county. For example, with respect to water and sewer, there are a multitude of different systems of different designs, ages and capacities. Given the size of the Island and the geographical dispersion of the population, it is unlikely in the near future that the Island will be served by truly integrated water or sewer systems. These factors, (i) size, (ii) diversity and (iii) geographical dispersion seem to indicate that the establishment of standard, island-wide Development Fees for most types of infrastructure will be at best difficult and perhaps impractical. Further complications are caused by the fact that much of the new infrastructure needed will be caused by master plan development projects. Different developments of this nature, in different locations will undoubtedly have different capital facilities costs. Nevertheless, once these differences from the more typical situation are recognized, a feasible, equitable and successful plan is possible. 2. Road Fees. Road or traffic fees are usually the most difficult of all development fees to establish. Before a local agency can calculate development fees for roads, it must establish a service standard for roads. That may seem straightforward, but there are considerations that complicate the choice. The most standard is based on the Institute of Transportation Engineers (ITE) scale of road serviceability. Under this scheme, level A is where road usage is light and travel is at design speeds, and level F is where road usage is so great that it Hawau II-A 5/11/89 4 creates gridlock. Most cities aim to maintain level C or D service standards, which allow for some congestion, but not enough to affect travel speeds or waiting times significantly. The problem is that existing road systems may have not been kept up to those standards, and courts have ruled that Development Fees cannot be used to remedy existing deficiencies. If roads serving a developing area are below the standard upon which Development Fees are based, the agency must use agency-wide revenues to upgrade those roads, leaving Development Fees to finance their expansion to meet the needs of new development. Next, the costs of needed improvements, must be determined and estimates made of the traffic that will be generated by various land uses. Finally, the costs must be distributed among different land uses based on their respective traffic generating characteristics. The most common method is to allocate to each type of development (i.e. residential, resort, commercial), trip generation on a lane-mile basis, by unit of development. This amount is applied to the cosu of lane mile construction. This formula approach works well enough for communities where the fee will basically go toward increasing capacity of existing facilities. However, on the Island of Hawaii, particularly the west side, completely new facilities need to be constructed. The danger with the "formula" approach is that it doesn't consider special local needs. Next, the decision that must be made in setting road and highway fees is to decide in what geographic area the fees will be imposed. Local officials must decide whether fees would be more equitably imposed if the entity were Hawaii II-A 5/11/89 5 divided into zones and the fees were permitted to vary according to the level of improvements required in each zone. The use of zones has become very common. There are two reasons to zone the agency's jurisdiction into a set of nonoverlapping geographic areas when setting Development Fees. First, zoning allows fees to vary with infrastructure costs in different parts, and, second, it satisfies the legal requirement imposed by some statutes and courts that fees be spent for the benefit of those who pay them. The use of zones in conjunction with traffic impact fees varies widely and there is no consensus as to how large an area any particular zone should cover. For highways and arterial roads, it is appropriate to have larger zones, while smaller zones aze more appropriate for collector roads, which have smaller benefit areas. Thus, a system of zones should correspond to traffic corridors. The major objection to using zones is the assumption that development in one zone can cause congestion, and thus create need for additional roads, in other nearby zones. Normally, fees charged in a particulaz zone are based on the road needs in that zone, on the assumption that interzonal traffic averages out across the jurisdictional area. In other words, it is assumed that development in one zone has the same effect on traffic in other zones as development in other zones has on it. This is not always true. For example, it does not hold when zones cut across concentric rings of roads as one moves out from the central core or from employment centers. In such cases, roads in the inner zones are likely to be used by residents of new development in outer zones far more often than residents of Hawaii II-A 5/11/89 inner zones are likely to use outer zones. This is a classical Mainland central-city/suburban problem, but may also be applicable in Hi]o and West Hawaii. In that case, residents of outer zones will pay less than the cost of roads needed to serve them, while residents of inner zones will pay more than their fair share of road costs. To avoid that problem, the fee could be determined for a particular zone by calculating the total highway needs generated by new development in that zone or define its zones in such a way that interzonal usages more nearly balances out. 1) An Island-wide Development Fee using a standard formula based on the premise that any particular unit of development, wherever located, will put a burden on the Island-wide road system. This fee is to compensate the County for constructing either existing over-capacity road systems or to accumulate funds necessary for future road expansion necessitated by development. In establishing Development Fees for roads the size and the political jurisdiction over the entire Island allow for large area (Island-wide) considerations and solutions not available to most public entities on the Mainland. As discussed above, one of the major problems confronting public agencies is that traffic is often generated by development in neighboring political entities over which their is no control or policy coordination. Because Hawau is an island, this is not a problem. Therefore, to the extent it is rationale to assume that development on any part of the Island will have traffic and road use impacts elsewhere on the Island, Island-wide road Development Fees are possible. Hawaii II-A 5/11/89 ~ The major problem with Island-wide fees will be one of cost allocation. Road improvements on the West side of the Island (and in Hilo) will in all likelihood be considerably more expensive, due to the heavier populations and higher property values. Secondly, in many Districts, there is little or no growth and the small amount collected will not be able to be spent locally, in a visible manner satisfactory to the payer. Finally the Island- wide service facilities are administered by the State not the County. 2) Creation of different zones in order to accommodate different costs and needs (per zone) throughout the Island, with the fee still based on the formula. 3} Establish a series of zones for secondary arterial roads and subzones for collector streets. The amount of the fee would be based on the projected cost of the specific facilities needed to provide adequate service levels for each zone and subzone. Therefore, each unit of development would be charged a road fee with two components, based on the zone and subzone, respectively, where the project is located. Tying the fee to specific road projects may make the fee politically more acceptable. This approach will however, require a great deal more work than either (1) or (2). We note that for planning, purposes, the Island is already divided into 127 different Traffic Analysis Zones. These traffic zones could most likely serve as the subzones. The work would further be simplified by initially concentrating efforts in the areas of greatest development Hawaii R-A S/11/89 8 3, Sewer Fees. Setting sewer fees is more straightforward than setting road road fees because water and sewer fees can be based on actual costs of a single facility. Typically, most sewer facilities are built with excess capacity in anticipation of growth, and agencies recover the actual costs as individual users connect to the system, and pay "hook-up" or connection fees, which are actually Development Fees. Development Fees for water and sewer facilities usually are calculated by an engineering firm as part of a rate study used in setting use charges. Sewer systems are closed systems with natural boundaries; those boundaries define zones where the Development Fees can be imposed. For central facilities such as wastewater treatment facilities, Development Fees are charged to all development within the system's service area. For major sewer lines, fees are assessed against all new development that is served by the improved lines. Fees associated with wastewater treatment are generally assessed on the basis of average wastewater discharges for different types of development. For residential property, sewer fees usually are assessed on the basis of the number of bedrooms or the number of bathrooms in a house. For commercial property, they usually are based on the projected number of employees or the amount of floor space in the development. Development fees for industrial property usually are calculated separately for each development from engineering data for the particular industry in question, since industrial water discharge varies widely among types of industrial uses. In Hawaii, it is our understanding that there are currently no connection fees charged for sewer service. Considering that 95% of the Hawaii II-A 5/11/89 9 population is served by individual treatment units, the lack of a connection charge is quite understandable. Further, the establishment of sewer Development Fees are complicated by the many independent and dissimilar facilities. In most districts, there are individual treatment facilities (cesspool aerobic facilities) as well as small local treatment facilities (i.e. Papaikou, Kapehu, Pepeekeo, Kailua and Keauhou). Finally, many resorts operate their own systems. Despite the problems listed above, the County simply must start to develop a method of recovering some of its projected wastewater facilities costs, simply because the projected needs are overwhelming. Further, it is much easier to collect connection fees from new development then to collect them from existing homeowners. It is also important to realize that many urban zones contain areas not yet served by veatment plants, but likely to be required to be so served in the near future (10 years). Everytime a home is built in one of these areas without the collection of a sewer fee represents a probable future County general fund expenditure to the extent that it may be politically and practically infeasible to charge connection fees to existing homes when they are required to connect to a treatment system. All new development in these areas should be charged a sewer Development Fee in order to begin accumulating monies for the eventual treatment facilities. Similarly, there may be azeas which are not located near existing treatment plant at a11, but because of development, or problems with individual facilities (i.e. coastal areas) will eventually require treatment plants and not individual facilities. Hawaii II-A 5/11/89 10 According to the General Plan, these areas seem to have been already identified. Establish fees for the west side as soon as possible. Consider the new treatment faci]ity on the Kona side of the Island. As we understand it, approximately one-half of the approximate 4.8 of capacity through development fees. (Note that to the extent the extensive expenditure required for the Hilo system are not for increases in capacity but represent an upgrade, development fees cannot be used.) Obviously, the fees should be based on zones, with the zones corresponding to the service area of a specific treatment plan. We would also advise the establishment of Development Fees in the rural areas, based on the not unlikely eventuality of cesspools being eventually prohibited. This Development Fee would be aimed primarily at in-fill development. For instance, in the Puna District, the General Plan states that "the use of cesspools and individual household aerobic treatment units will probably be continued until such time as increased population distribution and densities make it economically feasible to install municipal sewerage systems." The County should start accumulating funds for that system (and others) now. On the negative side, there is the risk that insufficient development would preclude the construction of treatment facilities. 4, Water. Currently, the Water Department charges Island-wide development fees (the Department uses the term "facilities charge" for water facilities. Hawaii II-A 5/11/89 11 The amount is based on their average capital costs for capacity throughout the Island, with a credit for amounts funded by State monies. It is our understanding that a recent engineering study recommends a 20% increase in the facilities charge. although by California standards the facilities charge appears low, it appears that the Water Department is making growth pay for its share of water facilities. Considering that the County operates over 20 systems and the wide variety of sources, capital facilities costs are bound to vary significantly throughout the Island. Department of Water personnel verified this observation. Although our experience has shown that a disparity in actual cosu compared to the charge leads to problems, this does not appear to be the case on the Island of Hawaii. The only criteria we have of this practice is • that it might subsidize development in areas where it wouldn't occur if true costs were charged. However, due to the many different systems, a fee based on actual costs would probably be awkward to develop and administrator. We assure that the fee is also set considering any plans for the construction of larger, area-wide storage and distribution-wheeling capabilities and repletushment of groundwater sources programs. The Department also has a "capital assessment fee" [We need additional clarification regarding this item]. 5. Drainage. [It is our understanding that basis for drainage requirements for new development is that the new development cannot contribute to increase drainage problems. Typically, the developer is required to install Hawaii II-A 5/11/89 12 on the property. The precise facilities required will vary according to the physical attributes of the property. While adequate in some senses, this approach does not contribute to area or regional solutions.] Another approach is based on the assumption that all developed property, regardless of its physical condition, contributes to run-off and hence flooding within the particular drainage basin. The costs of the facilities necessary to correct the flooding problems for a particular region are then estimated. Often, this is done city-wide, based on development until build- out. For the Island, drainage fees could be set using a zonal method such as that used in setting fees for roads, only in this case, rather than being defined to correspond with road corridors, the zones correspond to topographically determined drainage basins. Improvements that must be made to the existing system to meet the needs of new residents over a ten or fifteen years horizon are established in the master drainage plan. The cosu of the needed improvements are determined for each drainage basin and allocated to the new development that is projected to take place. The cost of these facilities is then assigned on a uniform per-acre basis to all development within the zone. The developer still remains responsible for all necessary on-site facilities. On Hawaii, the zones could probably by identified through the Drainage Master Plan, subsequent U.S. Army Corps of Engineers and Department of Agriculture and Federal Emergency Management Agency Studies. Actual development fees will need to be based on a pro-rata share Hawaii II-A 5/11/89 13 • of the actual costs of the off-site drainage requirements, Basing development fees for off-site improvements on area (acreage or square feet) is standard. However, because drainage improvements will vary from use to use and with the Island's varying topography, local zones are inevitable. It appears that according to the General Plan the areas of projected large scale development (North and South Kona) suffer from more severe flooding than the rest of the Island with the exception of Hilo. The master plan nature of development in this area indicates a strong possibility of a successful implementation of a drainage fee in this region. 6. Setting Development Fees for Other Infrastructure. Development fees for open space, parks, administrative, schools, libraries, and fire and police facilities generally are based on the costs of meeting specific service standazds. Unlike development fees for roads and water and sewer facilities, these fees are not based on any direct evaluation of the adequacy of existing facilities and facility expansion needed to serve new residents -either actual or projected. Instead, it is assumed that these are adequate facilities to serve established residents and the need to build comparable facilities to meet the needs of future residents. The relatively independent nature of these capital facilities, means the procedures for setting development fees are relatively simple. Critical for each type of facility is establishing an appropriate service standard. For open space and pazks, the standard is usually defined in terms of a specific amount of open space or park acreage per resident; for schools, a specific number of classrooms per pupil; and for fire and police services, the infrastructure and Hawaii II-A S/11/89 14 • equipment needed to achieve specific response times or patrol levels. If facilities currently serving established residents do not meet the specified standards, the local agency must bring them up to standards using public revenue sources before they can use Development Fees to finance the facilities necessary to serve development areas at the higher standard. For Hawaii, with respect to public safety, parks and recreation the situation is not atypical. The critical element is establishing the service standard. The only wrinkle is that the service standard will vary to the extent that the needs and burdens imposed by tourists will have to be considered. As mentioned above, development cannot be charged with upgrading service levels, rather to provide existing the new development with existing service levels. To the extent that service levels are currently deemed inadequate in areas of high growth, these inadequacies should be dealt with as soon as possible. Otherwise, in the future, County revenues will have to be spent not only to increase existing service levels for existing residents, but also to increase service for subsequent growth to the higher standard. For new administrative facilities, fees are calculated on a per capital basis. It seems reasonable that visitors should also be included. Summary. Due to the size and diversity of the Island, most Development Fees will by necessity have a local, or zoned component. To the extent that establishing a Development Fee system containing extensive regional deviations takes increased staff and consultant time, the County would be best served in proceeding in the regions where the fees are most needed and Hawau II-A 5/11/89 15 will raise the most capital. Since it appears that West Hawaii will have the most extensive and largest developments, efforts should be concentrated there. One further comment regarding the County's policy of placing "affordable housing conditions" on recent developments. Typically, the cost of Development Fees are incorporated into the price of a house and passed on to the home-buyer. For multi-family rental units, the cost is normally reflected in increased rents. The total of all these fees is significant, estimates of County staff range from $ to $ It is undeniable that the imposition of these fees upon "affordable housing" works at cross purposes with the County's affordable housing policy. It is also undeniable that the impact of an affordable housing unit is equal to that of a market price unit. It may very well be that the County will be under pressure to waive fees for affordable housing uniu. To the extent that the supply of housing is limited by lack of necessary infrastructure, such a waiver would also negatively impact on the County's affordable housing policy. Hawaii II-A 5/11/89 16 Improvement Districts 1. Introduction. Improvement Districts, through the issuing of assessment bonds, can be used to shift the financing of infrastructure from all taxpayers to those who specifically benefit from it. In effect, special assessments and special districts are fortes of private financing, where those who benefit from the infrastructure pay for the cost of those facilities. Before continuing, it is necessary to clarify what we mean by "Improvement District", since that term is often used interchangeably with the term "special district". For our purposes, the two terms have different meanings, and each has a different implication for the financing of new infrastructure. One is the traditional special assessment district established to finance itfrastructure that provides "special benefiu," as the term has been defined by the applicable statutes and the courts. (In Hawau, "benefit" is based on frontage, area or ututs) The term "special" refers to the fact that the district is used to finance infrastructure that provides primarily local or special benefits to a small group of people or property rather than general benefits to a whole city, community, or region. Such special districts seldom have their own goverting bodies and are established primarily as a financing vehicle. In recent years this type of special district has expanded to include improvement districts, pazking districts, building authorities, and renewal districts. Some of these districu, however, are more representative of the second type of special district, where the unit of government providing a public service is not a general purpose govertment - a city of a county -that has broad responsibilities but rather a separate government established to provide a single or "special" service. This kind of special district has its own governing body and is distinguished from cities and counties only in that it Hawaii II-B 5/11/89 1 provides limited services. Examples include regional water and sewer districts, transit districts, and school districts, We will be focusing exclusively on the first category, Improvement Districts, as infrastructure financing vehicles. Traditionally, Improvement Districts have been limited to financing smaller, "local" improvements such as subdivision streets, sewer and water lines, curbs, gutters and sidewalks. However, there is a increasing trend to look toward Improvement District financing for larger, regional facilities such as sewer plants, primary and secondary road improvements, including intersections and drainage. 2. Application in Hawaii. Improvement Districts are effective means of financing public improvements as they are needed. However, they are only truly effective on larger-scale developments. Improvement Districts are one of the most effective methods for shifting the costs of infrastructure to developers. It also provides an effective and equitable means of dividing infrastructure costs between several property owners. This is true not only for residential/subdivision purposes but commercial, industrial and resort development infrastructure as well. Improvement districts can also be used to upgrade facilities for an identified, developed area. Financing sewerage treatment facilities for areas, formerly served by skeptic tanks are a common example. However, it is usually much easier to structure developer driven transactions. Often, existing homeowners will be opposed to their inclusion in any assessment district. They are ineffective for in-fill development because of the random, untimely nature of such development Hawaii II-B 5/11/89 ? We understand that the Island has had several experiences with assessment bonds, including a default situation for Discovery Harbor. Most recently, the Island issued assessment bonds for a residential subdivision (Improvement District No. 16). Historically, it appears that the Island has been engaged in using assessment bonds in the traditional manner, for local, subdivision-wide, on-site improvements. Many of these improvement districts were probably limited to a single developer. Effective use of improvement district financing will, for much of the development on the west side, require a shift of emphasis away from only subdivision on-site improvements to regional facilities as well. Furthermore, the County will no longer be looking at single developer districts, but rather multiple developer districts, with differing goals and timetables. The regional infrastructure facilities that can be financed include the following: 1) streets, roads, interchanges, 2) water facilities, 3) sewer facilities, 4) drainage, 5) all of these facilities or any combination thereof. The Keahole to Kailua Development Plan is a very good example of such possible improvement district. (See Chapter ~ Another example is the possible Alii Highway improvement district. Financing larger, regional type facilities through improvement districts, will by necessity involve use of other financing vehicles specifically, Development Fees and Reimbursement Agreements. It is very important to stress that Improvement Districts are seldom identical. Improvement Districts are methods of financing real estate development and every real estate development is unique. Therefore, any discussion of how they may be employed cannot be universal. Rather, in the real world they must be approached on an individual case by case basis. This means that the success of any single Hawaii II-B 5/11/89 3 • Improvement District is greatly dependent not only upon the willingness of the property owners to participate, but the commitment of time and effort by staff and financing professionals i.e., underwriters, bond counsel, engineers. 3. Legal Considerations. It is our understanding that the general authority to issue assessment bonds is conferred upon Counties by Section 46-80, Hawaii Revised Statutes. The actual details and specifics were contained in Section 67, Hawaii Revised Statutes. Section 67 has subsequently been repealed. In addition to Section 67, the various Counties, including the County have enacted ordinances (Chapter 12, Hawaii County Code of 1983) spelling out the specifics of improvement district formation and assessment bond issuance. The first legal question to be answered is whether the County's authority to enact Chapter 12 is dependent upon Section 67, which no longer exists, or Section 46-80. If the former, it would appeaz that the County cannot currently issue assessment bonds. If the latter, the next legal question revolves around the content of the particular legislation containing the working details. The answers to this legal issue aze critical. Posed differently, the question is: Does the repeal of Section 67 leave the County free to amend Chapter 12? Or are there other limitations upon the County's ability to amend Chapter 67? Obviously, if the County is free to amend Chapter 67, many difficulties can be readily solved as they are encountered. Due to the unique attributes of every assessment district, the ability to accommodate and solve problems unique to a single district on a case by case basis cannot be overstressed. In light of the County's relative inexperience and infrequent issuance of assessment bonds, coupled with the Hawaii R-$ 5/11/89 4 County's lack of experience in using assessment bonds to prde regional facilities, the ability to amend the improvement and assessment bond legislation on a local level would greatly facilitate the County's ability to provide infrastructure financing through improvement districts. In this context, consider the Californa experience. In California, general law (as opposed to home rule) cities must form districts under the 1913 Act and issue bonds under the 1915 Act. One would think that after over eighty years of experience, the law and procedures would be fully developed and straightforward. However, this is not the case. In every State legislative session for the last twenty years amendments to both 1913 Act and 1915 Act have been not only introduced, but adopted. In some years, proposed changes have run into the dozens. Constant revisions are made necessary by the changing nature of infrastructure needs, different types of developments. If State legislation is required, the County would be faced with the task of having a new, responsive assessment code drafted and enacted. If this is the case, the County should consider asking the State to implement Mello-Roos type legislation rather than attempting to rewrite the assessment code. If however, the County need only amend Chapter 12, the use and flexibility of assessment bonds would be much more effective. The above legal questions urgently need to be addressed if the County is to proceed with large scale use of assessment financing. Nevertheless, set forth below is a commentary on certain provisions of Chapter 12 that create some financing problems. [TO COME] Hawaii R-B 5/11/89 5 4. Tax Considerations. The Tax Reform Act of .1986 considerably lightened the ability to pursue assessment bonds for some types of projects on a tax exempt basis. The following pages contain a short, legal memorandum from the bond law firm of Orrick Herrington & Sutcliffe summarizing some of the legal technicalities. In general, the question issues focus on the public vs. private nature to some improvement district projects. For example, is a publicly owned road which leads only to a single resort in fact a public or private use? There is considerable uncertainty in this area of law and reasonable bond counsel differ in their interpretations. Additionally, the analysis will typically depend on the facts of any individual case. Hawaii II-B 5/11/89 6 • . Lqw OFFICES ORRICK, HERRINGTON k SUTCLIF~ 600 MontgomeR• Street San Francisco, Calilornia 94111 Telephone (415) 392-1122 Telecopier (415) 773-5759 Telex 70.3520 Los Angele4 Cali(ornu 90071 New York, New lbrk tD022 Sacramento CalUornu 95814 333 South Hope Street 599 Lex mgwn gvenue 555 Capuol Mall Teltphoru (213) 880-7000 telephone (212) 726-8800 Telephone (916) 447-9200 Writer,' Direct Dul Number EFFECT OF TAX REFORM ACT ON ASSESSMENT BOND FINANCINGS Introduction Assessment bonds are a traditional method by which municipal entities may finance essential governmental improvements within their jurisdictions. State or local municipalities establish assessment districts to finance improvements that will specially benefit parcels in a specified area within the jurisdiction of the larger governmental unit. In such financings, bonds are issued to finance such improvements as municipal water systems, streets, paving, curbing, storm water collection, sidewalk and street light installation, utility undergrounding and sewage disposal facilities. Repayment of the bonds generally is derived from the so-called special assessments levied against the affected or benefitted property., Methods for imposing such special assessments vary from state to state. Generally, the assessments are levied on a property frontage basis or some other basis which reflects the benefits received by the property as a result of the construction or the improvements. in all cases, however, the assessments mus: be levied based on a mandatory assessment against all property benefitting from the improvements. In most cases, property owners are given the option of paying their assessment in full or making their payments over time. Summary of Effect of the Tax Reform Act of 1986 The Taz Reform Act of 1986 (the "1986 Act") replaces the familiar industrial development bond concept (with its 25% threshold for private involvement) with that of "private activity bonds" which are bonds more than 10~ of the proceeds of which are to be used (directly or indirectly) in the trade or business of any non-governmental person (the 'trade or business test") and more than lOc of the payment of principal or interest on which is to be derived from, or secured by, payments or property used in a trade or business of any non-governmental person (the "security interest test'). Both the trade or business and the security interest test must be O HERRINCTON & SUTCLIFF' • satisfied for bonds to be classified as private activity bonds, interest on which is generally tazable. In addition, bonds will be treated as private activity bonds if the lesser of 5k of the bond proceeds or SS,ODO,OOD is used to make or finance loans, directly or indirectly, to non-governmental persons. Generally, assessment bonds are treated as indirect loans to the underlying property owners for federal income tar purposes. However, there is an exception to the private loan provisions for assessment bonds where the "deemed loans' are available equally both to business and non-business borrowers. Thus, the private loan limitations often will not apply to assessment bonds. Detailed Analysis of Impact of the 1986 Act A. IDH or Private Activity Bond Problem 1. Security Interest Test Although, as described later, an ezception is provided from the private loan bond restrictions for many assessment bonds, assessment bonds need to be carefully reviewed under the Section 141(b) "private business tests." Section 141(b} provides that a bond issue is a "private activity bond" if (1) more than 10's of the proceeds of the issue are to be used for any private business use, and (2) more than 10$ of the principal of, or interest on, such issue is directly or indirectly secured by private business use property, or payments in respect of such property. Although it appears that 'revenues from generally applicable tares are not treated as payments for purposes of the security interest test;...special charges imposed on persons satisfying the use test (but not on members of the public generally) are so treated if the charges are in substance fees paid for the use of bond proceeds." Conf. Rept. II-688. While the Conference Report fails to elaborate further, it appears that special assessments are likely to be treated as "payments' (at least where the trade or business test, discussed below, is satisfied) since they are, in effect, payments received from persons using the financed improvements and they are not tares of general applicability. This result (i.e., that assessments satisfy the security interest test), appears to be reached in aII Cases where the owners of the property assessed are treated as "using' the property. Of course, if the assessed property is owner-occupied residential, then the security interest test generally would not be met since such property is, by its nature, not "trade or business" property. Even in the case of~ owner-occupied residential property the security interest test 2 ` ~IC K, HERRINGTON & SUTC L.. E• could be satisfied. For ezample, if assessment bond proceeds are used to pay for costs of undergrounding electric lines of a private utility and the utility refunds all or a portion of such costs (typically based on service provided), such refunds appear to satisfy the security interest test, even though the refunds are not based on assessments. Moreover, the use of the facilities by the utility will also satisfy the trade or business test. See Section 118 of the Internal Revenue Code of 1986, as amended. 2. Trade or Business - Use Test The "use" question in the content of assessment bond financings is discussed in detail in the Report of the Committee on ways and Means of the House of Representatives {"House Report"), at page 523. In an extended discussion of the "use" question applicable to certain assessment bond financings, it was concluded that the tax status of assessment bonds generally will be determined by reference to the ultimate use of the facilities. The question discussed was whether the financed improvements would be treated as being used by the developer or developers in the assessment district where initially all the land in the district was owned by that limited group. It was concluded that bonds may be treated as governmental bonds, or as ezempt-facility bonds, provided that: "(1) the facilities are designed to serve members of the general public in the governmental unit on an equal basis; (2) ultimate ownership and operation of the facilities is with persons other than the developers (e.g., the governmental unit); and (3) develoement of the district for sale and occupation by the general public proceeds with reasonable speed. Failure of the developers to complete the district for use and occupancy by the general Public, or financing of any facilities to be used by one or a limited group of Persons results in interest on the bonds being taxable from the date of issue." (Emphasis added)=' i' Of course, under the House version of H.R. 3838, the security interest test was eliminated and, thus, only the use test was relevant for determining private activity bond status. However, the Conference Report statement on the security interest test discussed above ties satisfaction of the security interest test under the 1986 Act to a determination of the use test question. Conf. Rept. II-68&. 3 Oi • HERRINGTON & SUTC LIFFI • The first part of this analysis seems correct in that the 'ultimate use of proceeds" test should prevail. The analysis should turn on whether the financed facilities are purely public or essentially private. For ezample, compare two situations where financed roads are in a closed industrial park (or cul-de-sac) versus similar improvements for a thoroughfare. In the former cul-de-sac case, there is a substantial likelihood that under ezisting authorities, the financed improvements will be considered used in the trade or business of the industrial park owner or occupants and the trade or business test will be met even though the improvements are public property. In the second case, the opposite, mole favorable, result will obtain. For ezample, where costs were incurred in paving a Cul-de-sac road adjacent to a taapayer's warehouse the paving was found to be a necessary and integral part of the tazpayer's general warehouse operation, and the road was 'not used primarily in the public business" despite fee ownership of the road by the city. Therefore, the tazpayer was allowed to depreciate the expenditures for the road. D. Loveman 6 Son Ezport Co., 39 T.C. 777 (1960), aff'd. 296 F.2d 732 (6 Cir. 1961}, cert. denied 369 U.S. 860. In D. Loveman b Son the Taz Court distinguished an earlier holding where improvements were used primarily by the public. In Algernon Blair, Inc., 29 T.C. 1205 (1958), a tazpayer incurred ezpenditures for street paving, curbs, sidewalks, and water and gas mains, storm and sanitary sewers and drainage facilities. Upon completion the city took over maintenance and the improvements became part of the street system for public use and convenience. The Taz Court rejected the tazpayer's argument that the facilities were used in his rental housing trade or business and thus were depreciable. See, also, Wilshire-La Cieneaa Gardens Co. vs. Riddell, 198 F. Supp. 939 (S.D. Cal 1956). Similar use analysis is present in the Treasury Regulations dealing with the definition of industrial development bonds (Treas. Reg. §1.103-7(b), et seq.) and those dealing with the public use test applicable to ezempt facility financings (Treas. Reg. §1.103-8(x)(2)7. While not directly on point, see, also, Letter Ruling 8630027 in which the Internal Revenue Service concluded that a special district covering only a single developer's property did not qualify as a 'political subdivision" although the district formally was granted the power of eminent domain and the power to impose ad valorem taws. Apparently, the Service concluded that the district ezercised no sovereign powers over the property owner as a practical matter since the developer alone controlled the district's board of supervisors. As to the second part of the House Report analysis, conversations with staff members of the tag writing committee in Washington indicate that the discussion at page 523 of the 9 O1. -~I"IERRINCTON & SUTC LIFFI House Report represents their view of the long standing trade or business test in the case of assessment bonds which requires the developer to complete the development to avoid retroactive tazation. This is a very troublesome position because it ignores earlier rulings that indicated that the trade or business test is based on expectations at the time of issuance. Where an unezpected change in facts or circumstances outside the control of the issuer resulted in more than 25$ of the financed facility being used in a trade or business of a non-ezempt person, governmental bonds did not become TDB's, at least in cases where there was a period of "untainted' governmental only use. See Rev. Rul. 77-916. An additional problem highlighted by the House Report discussion relates to financings "of any facilities to be used by one or a limited group of persons.^ This discussion may be consistent with prior law in requiring an analysis of the public nature and ezpected use of financed facilities. Thus, if either the developer plans to retain ownership of the property in the district or the district is being developed for sale to a small number of commercial or industrial users, the use test may be satisfied depending on the nature of the improvements (open and generally available to the. public or essentially private use facilities, although nominally dedicated to the municipality}. See, discussion above relating to the D. Loveman b Son case. The use test also would also appear to be satisfied as to any facilities owned or operated by a private party such as where assessment bond proceeds are used to pay for costs of undergrounding electric lines of an investor owned utility. Private Loan Bond Provisions As mentioned above, it appears that most, if not all, assessment bonds are considered indirect loans to the owners of the assessed property for federal income taz purposes. Specifically, Section 164{c) of the Internal Revenue Code of 1986, as amended (the 'Code') disallows a taa deduction for "taws assessed against local benefits of a kind tending to increase the value of the property assessed...." Such section does permit, however, the deduction of so much of the special assessment "as is properly allocable to...interest charges.' See also Treas. Reg. Sections 1.164-9(a) and (b). In addition, to the eztent not deductible, it appears a special assessment is a capital ezpenditure item, the amount of which is added to the tazpayer's basis in land. See Rev. Rul.. 55-289, 1955-1 C.B.25. In effect, the issuance of assessment bonds and the application of the special assessments constitute a deemed loan for taz purposes the interest portion of which is deductible, and the principal portion of which is added to the 5 ' ~RRICK, HERRINGTON & SU. _~E taxpayer's basis in his or her property. As a consequence o.f this analysis, Section 626 of the Taa Reform Act of 1984 included an exception from the private loan bond restrictions for most assessment bonds. The 1986 Act continues this ezcep*_ion from the private loan bond provisions and also clarifies the application of the exception 'to permit indirect loans to business as Well as to non-business persons, provided the loans are available on an equal basis to both business and non-business borrowers.' Conference Report at II-692. Conclusion The 1986 Act contains provisions that put additional restraints on assessment district financings (and in particular on single developer assessment districts). The 1986 Act has created a need to more closely review the tax analysis of all such transactions. The most important questions focus on whether particular assessment bonds are to be treated as 'governmental bonds" or as 'private activity bonds" (which are generally taxable). In making this analysis, there must be a determination made of the use of the facilities or services being financed to assure that they satisfy the general public use test in order to avoid both the security interest test and the trade or business test. In addition, it may be necessary to obtain appropriate covenants from the developer to complete development expeditiously and prohibit changes in the development plan. Larry D. Sobel 6 C. General Obligation Bonds 1. Introduction. General obligation (G.O.) bonds are also known as full faith and credit bonds because their repayment is based on the general credit and taxing powers of the borrowing government. The promise to repay is unconditional, although there is a distinction between general obligation bonds payable from unlimited taxing power and those where the power to tax for debt repayment is subject to some kind of limitation. The only legal limitation in Hawaii is that the outstanding amount is limited to 15% of the assessed value of real property within the County. The bondholder looks to the borrowing government to take whatever actions are necessary to assure repayment. Historically, general obligation bonds have been the major source of financing for the County. G.O. bonds, being tax-supported, are typically used to finance the capital portion of tax-supported genera] public purpose governmental activities with public buildings, roads, criminal justice facilities, and schools being the most common uses of G.O. bond proceeds. Historically, the County has also used them to fund virtually every type of infrastructure needs. Nationwide, while G.O. bonds comprised over the two-thirds of annual state and local government debt issuances as recently as 1975, they now comprise approximately one-third of new issues. The relative decline can be partially explained by the growth in public borrowing for new purposes such as industrial development, housing and hospitals. The greater emphasis on user- charges to support utility, transit and refuse deposal and other municipal services explains the Hawaii II-C 5/11/89 1 expanded use of revenue bonds at the expense of general obligation bond issuance. Finally, and perhaps most importantly taxpayer resistance and the desire of public officials to carefully allocate their limited taxing and borrowing authority have also reduced the use of G.O. bonds. Hawaii has so far not been part of this trend, however, the County will undoubtedly be subject to all these pressures. 2. Outstanding Debt. The County currently has outstanding general obligation ("G.O.") bonds in the amount of $ (Source: 1987-88 Financial Statements). It is our understanding that another $10.2 million will be issued in June and there is the possibility of approximately $30 million for Fiscal Year 1989- 90 (Department of Finance). [Additional Information needed from Finance) 3. Credit Summary. [TO COME] 4. Limitations. [TO COME] 5. Projected G.O. Debt Capacity. The first and foremost credit question is ability to meet debt service payments. This is a simple cash-flow analysis. For example, the 6 year operating program contained in the proposed 1989-90 Budget estimated G.O. debt service charges through Fisca] Year 1994-95 as follows: - 1989-90 $10,301,221 1990-91 9,154,313 1991-92 9,289,225 1992-93 9,147,224 1993-94 9,017,831 1994-95 8,852,822 uau,a;; TT-C 5/11/89 2 We are assuming that these projected amounts include the $10.2 million tune issue as well as a estimated $28.7 million for Fiscal Year 1989-90. In order to issue additional bonds, the monies necessary for principal and interest payments need to be identified. Typically, such uncommitted money is identified in and of year fund balances which, from the 6 year operating program are set forth below: 1989-90 $2,924,016 1990-91 3,423,386 1991-92 3,543,386 1992-93 3,643,386 1993-94 3,743,386 1994-95 3,843,386 Based on these amounts and assuming a 20 year term, 8.5% interest rate and 10% coverage factor, the county is capable of issuing more in G.O. bonds. (See next page) This amount could be increased to the extent that annual budgeted expenditures contain amounts budgeted for capital items that could be funded out of bond proceeds. For example, Public Works has annual projected expenditures ranging from $7,5 to $9.0 million, some of which are undoubtedly capital expenditures that could be funded from Bond proceeds. Further, on the revenue side, from 1989-90 out the projections assume tax revenues will increase at approximately 2.8%. This appears conservative given recent growth trends. While appropriate for an initial bond sizing, it is likely that uawaii ii-C S/11/89 3 tax revenues will most likely be greater, thus allowing additional issues in future years. The County also has the option of increasing taxes to allow go additional G.O. bond issuance. This following cash-flows contain a simple analysis of funding capacity, using the following assumptions: 1. Total Taxable Value for each year based on the Budget 'Taxes".line item and a % current tax rate. 2. Respective tax increases of 2%, 5% and 10%. 3. All of the incremental tax revenue is available for debt service. 4. 20 year term, 8S% interest rate and 10% coverage. Given the current data available to us, the above predictions are somewhat simplistic. We note that further information may be available from the Suyderhoud system. However, we understand that preliminary material received from Suyderhoud indicates the possibility of General Fund deficits in the near future. Such deficits would preclude or severely limit the G.O. bonding capability of the County. Hawaii II-C 5/11/89 4 • D. Revenue Bonds I. Introduction. Under this heading, we will be discussing two types of revenue debt instruments. One, "Project Revenue Bonds" involve the pledge of user fees or tolls derived from a specific service to provide facilities for that service. The second, "Special Revenue Bonds" involve a dedicated stream of revenues, (sales tax, tax increment, gasoline taxes) pledged to a bond issue may or may not be related to the source of revenues. Project Revenue Bonds have enabled state and local governments to finance a wide range of projects. Bridges, airports, water and sewer treatment facilities, health care facilities, and state and local housing projects are generally financed by Project Revenue Bonds. Project Revenue Bonds do not burden the credit capacity of the municipality itself, nor do they typically require a referendum, as do many general obligation securities. A Project Revenue Bond is in effect paid by the users of the project being financed. Project Revenue bonds are issued by the state or local government, or by an authority, commission, special district, or other unit created for the purpose of issuing the bonds and constructing and operating the project. One common way to classify the variety of revenue bonds is according to the method by which funds are generated to pay the bonds off. Some examples follow. Hawaii II-D 5/11/89 1 User fees -Water, sewer, and electric revenue bonds are among the most commonly issued. The fees charged the users of these services are the sources of payment for the debt, and can be varied to meet debt obligations. Typically, user fees also include connection charges. (Note that connection charges are in fact a type of impact or development fee.) Tolls, concessions, and fees -Highways, bridge, airport, dock, and similar projects that are financed by revenue bonds raise funds through tolls, concessions, and direct fees. For example, airlines pay fees for use of space at, airports. The analysis for potential use of Project Revenue Bonds on Hawaii will focus on the water and sewer systems. As mentioned above, such revenue bonds would be "user fee" backed, that is the monthly or periodic fees charged to customers must pay debt service on the bonds, plus operation and maintenance costs of the system. Before continuing, we note that the Island has the capability to issue Project Revenue Bonds for toll roads and solid waste systems. With respect to toll roads, without undertaking a feasibility study, our experience indicates that the traffic patters and usage would probably be insufficient to become self-supporting financing source for a new highway or "turnpike". Use of a toll road may be marginally useful as a revenue supplement, but that is beyond the scope of this plan. (a) Solid Waste. Solid waste facilities are increasingly funded through systems of user and development fees. The user fee typically takes the form of a "tipping" or tonnage fee based waste disposed of. We note that in an area as rural as most parts of the Island are, tipping fees often lead to illegal dumping. Further, many transfer Hawaii II-D 5/11/89 • stations would require staffing in order to administer the fees. (Note - in 1987-88 financials a separate solid waste fund is not identified. We really have insufficient data with respect to solid waste operations.] However, to the extent that the cost for solid waste disposal have been increasing dramatically, particularly in urbanized areas, the development of a revenue enterprise fund for solid waste should be further examined. (b) Sewer. The overriding characteristic of sewer service on Hawaii is the fact that 95% of the residents use individual systems and thus do not pay any sewer service charge at all. Although it is likely that this amount will increase in the future, the fact that treatment will cost more from individual systems will cause significant problems. Thus, our analysis must be on the six existing treatment systetns run by the County. The situations in which revenue bonds may be used to finance sewer facilities. Entire new systems: Both large scale development and the need to provide treatment facilities for areas currently served by individual facilities will lead to construction of new systems. Because sewer revenues depend on user charges, a plant will not generate revenues until construction and utilization. Therefore, bond debt service must be paid through capitalized (borrowed) interest during construction. Further, the capability of repaying depends on timely construction, performance and projected connections. For those reasons, the financing of entirely new systems can often be accomplished more efficiently through other means, such as Improvement Districts. Hawaii R-D 5/11/89 3 Expansion of existing systems to accommodate new customers. Again, during the construction period, the new customers cannot be charged, hence the need to capitalize interest. Further, because of the typical sewer bond rate covenant (the contractual obligation of the system to the bondholders to raise rates to provide for debt service) existing rate payers in effect subsidize the expansion. For instance, if the capacity of a system is to be increased to accommodate a new subdivision, bonds may be issued and capacity increased. If the development doesn't take place or houses not sold and occupied, no user charges are generated. Eventually, the rate charged existing customers will have to be increased to cover the revenue shortfall. Despite the very real problems of existing rate payer subsidy, existing plant expansion has been traditionally financed through revenue bonds. However, in California, the vigilance of local citizens plus no-growth movements have often forced municipalities to desist in subsidizing growth through existing rate payers. Nevertheless, expansion of existing systems through revenue bonds are viable if the expansion is not dramatic and the development is relatively orderly and secure. What constitutes dramatic expansion is not easily unsecured. Doubling of capacity would be dramatic, but increments of ten or twenty percent might not be. Upgrading, Capital Repairs and Replacements. Revenue bonds are very effective vehicles for this type of financing. Costs are borne directly by those who benefit. The construction of secondary treatment facilities in Hilo could be financed in this manner. The County's Engineering Division has identified $ million in possible wastewater projects over the next six years. The Fiscal Year 1987-88 Hawaii II-D S/11/89 4 • revenues were only $1,776,808, including $700,000 transfer from the County's general fund. The figures for the 1989-90 operating budget are $2,139,614 and $943,729, respectively. The relatively small size of the budget compared to the future capital needs and the recurring operating deficit make it unlikely that the sewer revenue bonds will be a likely source of financing in the near future. Nevertheless, the county should make a effort to gradually correct the fund deficit and consolidate service areas into cost centers. (c) Water. In Hawaii, the water system is run by the Water Commission, which is asemi-autonomous body. The water system in Hawaii differs greatly from the sewer system in many other regards as well. One, the vast majority of users on the Island receive their water from the Department of Water Supply. Secondly, the financial position of the water system is sound and run as a self supporting system. Finally, the water system benefits fiom more active State involvement and funding. The actual sources of water supply involve over 20 different supply systems. While the user charges are uniform throughout the Island, it is true that both operating and capital costs differ significantly. For example, areas served by deeper wells require not only more expensive drilling equipment but higher power costs. (Power and pumping costs amounted to 32%of total operating expenses for Fiscal Year 1987-88.) Therefore, certain low cost customers are subsidizing high cost customers. Although this Island-wide system may lead to certain development and land use distortions (Certain higher elevation property becomes cheaper to development and maintain} it is certainly justifiable from a policy and administrative viewpoint. Hawaii II-D 5/11/89 5 Furthermore, the monthly equivalent dwelling with a charge of approximately $ ($5.15 standby plus gallons at ) is low, at least by comparison with many California communities. In terms of financing capabilities, the Commission's policy of running 20 separate supply sources as an integrated system is a definitely favorable. (Indeed attempting to run 20 separate sources as independent cost systems would be distress except for the largest sources). Entire New Systems. Because the system is run and perceived as a integrated whole, in one sense there will be no entirely new systems. In reality, large scale development, such as on the west side of the Island will require extensive capital improvements. However, due to the incremental nature of ground water supply (new wells can be added as needed rather than for in advance) equivalent facilities chazges based on actual costs of facilities (as appears to be the case now) combined with careful consideration of costs caused by large scale development indicate that the Department will have the capability to finance systems. Expansion of existing systems to accommodate new customers. Again, in a sense all expansions fit this category. The Department should be readily able to finance its expansion, since compared to the system as a whole, no single expansion will appeaz "dramatic." Also, since system expansion is incremental, the risk of rate subsidy is minir~r ized. Upgrading, Capital Repairs and Replacements. The Department appears to be funding these costs and given past performance will be able to do so in the future. Hawaii II-D 5/11/89 6 In the past, when the Department sought debt funding for water projects, the County has issued G.O. bonds (which are defined under law as "reimbursable general obligation bonds," Sec. 13.6 Act. VII of the State Constitution and are currently outstanding in the amount of $ on behalf of the water Department. The Water Department is actually responsible for debt service, but because of the County guarantee, these bonds received the benefit of the County's "A" rating. Although the County does not anticipate ever having to pay debt service for these bonds, they are technically "direct debt" of the County and impact the County's G.O. rating. Furthermore, given (i) the increasing pressures on the general fund, (ii) the massive amount of water improvements needed over the next _ years, excluding facilities financed through intergovernment transfers.) and (iii) the fact that the Water Department is one of the County's few viable revenue based operations, future financings ought to be done purely on a revenue basis. Based on our experience, and assuming a sound and prudent bond structure the Department should qualify for at least "BBB+" rating and more likely a "A-" rating. Additionally, and again assuming a prudent structure, water revenue bonds would probably qualify for bond insurance and the accompanying "AAA" rating. Given current market conditions, the overall cost of such a bond issue would be at maximum only marginally more expensive then a G.O. issue, while providing the G.O. rating with a margin of safety. As a practical matter, the County could apply for water revenue bond rating and insurance prior to any issuance. If the result is less than satisfactory, the County still has the option of proceeding on a G.O. basis. Through careful coordination of Hawaii II-D 5/11/89 ~ all financing team members this could be accomplished with a minimum of lost time. One caveat to the possibility of favorable ratings and bond insurance is the reliability of current sources and the Department efforts to replenish current supplies and secure source for anticipated growth. It is crucial that these activities are vigorously and systematically pursued. Failure to do so impacts negatively on ratings or the availability of bond insurance The following page contains a revenue bond sizing based on the following: 1. Revenue Bond Covenant. The County shall prescribe, revise and collect such charges for the services and facilities of the Enterprise which, after making allowances for contingencies and error in the estimates, shall be at least sufficient to pay the following amounts in the order set forth: a) All current expenses for the Necessary and Reasonable Maintenance and Operation Costs of the Enterprise excluding depreciation; b) The interest and principal payments on the outstanding bonds as such become due and payable; c) All other payments under the bond documents; and d) All payments required to meet any other obligations of the Enterprise which are charges, liens or encumbrances upon or payable from the Gross Revenues of the Enterprise; and the charges shall be so fixed that commencing no later than the date of issuance and in each Fiscal Year thereafter the Net Revenues Hawaii II-D 5/11/89 8 of the Enterprise shall be at least 1.25 times the amounts payable as interest and principal payments on the outstanding bonds. 2. Revenue Analysis (To Come] [From 1987-88 Financials, 1988-89 and 1989-90 Budgets] Note that we are not projecting customer increases. Such increases would obviously increase bonding capacity. 3. Bond Assumptions a) 8.5% Interest Rate b) 10% Reserve Fund 3. Special Revenue Bonds. As mentioned above Special Revenue Bonds involve the pledge and a stream of revenues, typically tax revenues to a particular service (i.e. highway). These revenues can also be pledged to debt service on a bonds issued to provide funding for the service. On Hawaii the only type of Special Revenue Bonds that are both currently allowable and financially feasible involve the Highway Fund. Reproduced below are the County's Budget Summary for Highway Fund for Fiscal Year 1987-88 through 1994-95. Based on the Budget Summary, and the following assumptions, we have sized a sample special Highway revenue bond issue. [To Come] [Note, we need further information with respect to the expenditures of the Highway Fund.] Hawaii II-D 5/11/89 9 E. Reimbursement Agreements Before beginning this discussion of reimbursement agreements, the reader should recall the discussion in the Introduction (Section I.C) dealing with excess capacity, specifically the example of the interchange, Reimbursement agreements are only used in the situation where someone has funded infrastructure capacity in excess of their requiremenu. The concept of reimbursement is simple enough. Someone, perhaps the first major developer, puts up the initial capital to build the needed facility. For example, suppose a highway interchange is needed. The money goes to the County which builds the interchange. The County enters into a reimbursement agreement with the developer. The agreement begins with a determination that property owned by the first developer will get, say, 40 percent of the benefits of the interchange. There will be no reimbursement for that. The other 60 percent of the interchange's benefits go to the surrounding landowners. Suppose their land is all undeveloped, and they are not ready to develop. The agreement would commit the County to levy a charge of those surrounding landowners when they sought permission to develop. The charge might be $100 per house or $5 per square foot of cortunercial space, for example. The revenue collected over the years would be paid to the initial developer as "reimbursement." The agreement would include legal remedies to insure that the charge was actually collected as agreed. Note that the initial developer can put up the capital for the interchange via an Improvement District. The reimbursements coming from the other property owners, when they develop, are in fact Development Fees. Hawaii R-E 5/11/89 1 ? ' ~ . • • Actual, workable and reasonably secured reimbursement agreements require attention to considerable detail and require at least partial solutions to several thorny problems. The more imponant detail are described below. Anther common example could be to use a reimbursement agreement to compensate a subdivider for running an 18-inch sewer line to his property rather than the 9-inch line actually needed just for this subdivision. As other landowners hooked into the 18-inch line, they were charged and the original developer reimbursed. There may be situations in which the initial developer is unwilling to front the entire cost of a facility. The County can find the difference (perhaps through General Obligation Bonds). In this case, the reimbursement agreement can run from the undeveloped property owners to the County. Thus, the risk of future development has been shifted from the first developer to the County. (Also, note how the subsequent developer's payments under the reimbursement agreement closely resemble Developer Fees.) The core of the reimbursement agreement can be quite simple. It provides that the developer (or other investor) will put up the money to build the facility, or perhaps actually carry out the collect a fee from other landowners within the designated area, and to pay all or maybe a portion of the resulting revenue to the developer. The agreement might say that the fee will have an interest component or a construction cost inflator. As with many contracts, the difficult problems have to do with "what ifs". The most important of these is what if the Agency decides, later on, to renege. It Hawaii II-E 5/11/89 2 • might decline to collect the fee at all, or it might refuse to increase the amount over time at the agreed rate, or it might want to wave the fee for a chosen project, perhaps a "socially desirable" project. After some years, the election of new members to the legislative body will probably increase the likelihood of renegery. If a subsequent ]egislative body should declare the entire area to be an open space preserve, the reimbursement agreement would become worthless. So the initial developer might want the agreement to include a commitment by the local government to allow the area to develop as planned. However, a commitment of that sort would probably be an illegal contracting away of the police power authority of councils. At first examination, collection seems relatively simple. The most obvious collection procedure is for the local government to refuse to grant the permits required for the landowner's proposed development until the charge is paid. If the landowner tries to develop anyway, then all the existing procedures for enforcing permit requirements come into play. The landowner can be enjoined from continuing with construction, and can be required to take down whatever be has already built. Amore complicated situation arises if the local government reneges and allows the proposed development to go ahead without insisting that the fee be paid. What could an unhappy holder of a reimbursement agreement do then? It would be legally awkward to somehow give him authority to stop the development and to force removal of work already completed. Amore likely alternative would be to provide that the unpaid development charge would be a lien against the newly developing landowner's property. Hawaii R-E 5/11/89 3 • A second set of variations involves making reimbursement agreements sufficiently attractive that outside investors, other than the initial developer or the County, might be willing to loan money for the proposed project. A prerequisite is that reimbursement agreements be tightly drawn and enforceable. But there are other problems. The most troublesome to most outside investors is that the rate at which the reimbursement agreement will be paid off is not predictable. The money may come back in five years, or in fifty. It depends on how quickly development of the area occurs. Few investors will loan money on that basis. A potentially more promising way of attracting outside investors would be to combine a reimbursement agreement with an Improvement District. For example, suppose that the local politics would allow formation of an Improvement District to finance a freeway interchange. The district could include maybe half of the interchange's eventual service area, but including much more would lead to substantial landowner protest. After creation, the Improvement District could issue bonds to cover the cost of constructing the interchange. The bonds would be secured by assessments against the land within the assessment district, and ultimately by the power to foreclose on that land if the assessmenu were not paid. In addition, the district could be a party to a reimbursement agreement, which committed the local government to levy a development charge on the other propertry owners within the service area of the interchange. The proceeds of that charge could be used to pay the annual assessments on the bonds. So long as development of the outlying Iand occurred at a fairly regular pace, the revenues would be sufficient to pay a substantial share of the assessments. The property owners within the district would only need to pay their proportionate share of the cost of the interchange. However, if development occurred more slowly than that, the property owners within the district would pay whatever was needed to pay the principal and Hawaii II-E 5/11/89 4 L l ~ • interest on the bonds on time. If landowners within the assessment district ended up paying more than their "share" during the early years of a project, for example, then proceeds of the reimbursement district might be used to compensate them directly in the later years. One the other hand, if reimbursement payments is any year were more than needed for the outlying landowners' share of the debt service costs, then the surplus could perhaps be put into an escrow account and invested at interest, and used in later years as needed. Reimbursement arrangements are inherently controversial. They require landowners to pay potentially large amounts of money. They may shift responsibilities for paying from where they would otherwise be. They may alter the prospects for developing an area, or may at least materially affect the timing of development. As such, they are usually only effective with respect of large properties and developers where.the extra time, money and effort can be justified. Hawaii II-E 5/11/89 5 r . • • F, Pay As You Go Routine, day to day operating expenses of a local agency are generally paid from current revenues. It is also very common for some level of capital projects to be funded from current revenues. This concept is often referred to as by the term pay-as-you-go. Typically, three interdependent reasons are given for this approach. First, interest costs adds to the expense of the facility, and therefore reduces the amounts available in the future for additional projects. Secondly, many politicians on the local level are debt adverse. Finally, and most importantly, is the question of affordability. Some communities (typically a mature, stable community which has achieved 'buildout") capital needs are so limited that they can afford to fund their limited needs out of current revenues. We will only offer a few comments on this approach. It doesn't work for communities with large, "big ticket" item needs. For instance a very few communities could construct a $20 million sewer plan out of current revenues. Nor could any community accumulate that amount in order to construct such a facility in a timely fashion. As a practical matter, the pay-as-you-go concept does not work in growing communities. Similar to most growing businesses, debt is necessary to finance facilities necessary for expansion. Hawaii II-F 5/11/89 1 . ~ This is certainly true for the County, particularly when considered along with the tremendous deferred capital project needs. The Island simply can't afford the "luxury" of pay-as-you-go for its infrastructure needs. Hawaii II-F 5/11/89 2 ~ PAYING FOR GROWTH IN HAWAII: L An Analysis of Impact Fees and Housing Exactions Programs Edited by: Dan Davidson AnnUsagawa Sponsored by: Land Use Research Foundation of Hawaii PAYING FOR GROWTH IN HAWAII: An Analysis of Impact Fees and Housing Exactions Programs Edited by: Dan Davidson Ann Usagawa Contributing Authors: David W. Rae Benjamin A. Kudo Louis A. Rose, Ph.D. Dan Davidson Sponsored by: Land Use Research Foundation of Hawaii LAND USE RESEARCH FOUNDATION OF HAWAII The Land Use Research Foundation (LURE) of Hawaii is a private, non-profit research organization incorporated in 1979. It is a membership organization comprised of major Hawaii landowners and development companies. The goal of the Land Use Research Foundation of Hawaii is the fostering of sensible land use planning and responsible development in the State. This is achieved through better understanding and communication among the various sectors that makeup Hawaii's community (government, business and general public), and a commitment to improving the processes of land use planning, government regulation and property development. The Foundation believes that quality land development provides an essential service for Hawaii's people and is critical to a healthy economy for our State. Copyright 1988 by the Land Use Research Foundation of Hawaii 700 Bishop Street, Suite 1928 Honolulu, HI 96813 Ph. (808) 521-4717 Printed in the U.S.A. All rights reserved. TABLE OF CONTENTS II M FOREWORD t PREFACE I INTRODUCTION I CHAPTERI Impact Fees and Housing Exactions Programs: A Planning Overview N By David W. Rae I Introduction and Purpose t General Definitions ~ N History 3 1 Impact Fee Programs 4 I Housing Exactions Programs ~ Hawaii Issues and Concerns 9 Conclusions 9 Footnotes to Text t t I CHAPTER 2 Impact Fees and Housing Exactions Programs: Viewpoints of Eight Hawaii Public Officials HAROLD S. MASUMOTO, Director, Office of State Planning 15 JOSEPH K. CONANT, Executive Director, State Housing Finance & 27 Development Corporation DONALD A. CLEGG, Chief Planning Officer, City 8 County of Honolulu 35 JOSEPH P. WHALEN, Director of Land Utilization, City & County of 47 Honolulu MICHAEL. MOON, Director of Housing & Community Development, Clty 57 & County of Honolulu CHRISTOPHER L. HART, Director of Planning, County of Maui 61 ALBERT LONO LVMAN, Director of Planning, County of Hawaii 73 TOM SHIGEMOTO, Director of Planning, County of Kauai 81 CHAPTER 3 Impact Fees and Housing Exactions Programs: A Legal Analysis By Benjamin A. Kudo Abstract 87 Introduction 90 Ability of Local Government to Implement Growth Management Policies 90 and Programs Local Government Power to Regulate 90 Development of Growth Management Policies and Programs 91 Utilized by Local Government Validity of Impact Fees 94 Challenges to the County's Authority to Regulate 94 Nature of the Exaction or Impact Fee Ordinance 94 Authority to Regulate 95 Constitutional Challenges to Impact Fees 99 Due Process Challenges 99 Equal Protection Challenges 99 "Takings" Challenges 100 Case Law Development Regarding Impact Fees 101 Specifically and Uniquely Attributable 101 The General Public Need Test 101 The Rational Nexus Test t 02 Nollan - A Fourth Test? 107 Requirement of Affordable Housing: Linkage and Inclusionary Zoning 110 Linkage Programs 111 Inclusionary Zoning 113 Guidelines for Drafting a Defensible Impact Fee Ordinance 115 Incorporation of Comprehensive Plans and Capital Improvement 115 Plans Fees Must be Proportional to the Need Created 115 Avoidance of Double Payment 115 Creation of a Separate Fund 116 Fees Must be Spent to Benefit the Development 116 Fees Must be Spent Within a Reasonable Time, or Refunded 116 Mechanism to Challenge the Fee and Exemptions 116 Equal Application 116 Fees Should Only be Used for Construction 116 Time of Payment 116 Documentation of State Interest 116 Impact Fees in Hawaii 116 Authority to Impose Impact Fees 116 County Home Rule 117 State Enabling Statutes 118 Use of Development Exactions in Hawaii 119 Summary 122 Footnotes to Text 123 CHAPTER 4 Impact Fees and Housing Exactions Programs: An Economic Analysis ey Louis A. Rose, Ph.D. Abstract 137 Economic Analysis 142 Introduction 142 Background 142 Purpose 143 Evaluative Criteria 144 Economic Efficiency Principle 144 Fairness Principles: Benefit and Ability; and Equity 144 Other Criteria 145 Infrastructure Impact Fees 146 The Nature of Impact Fees 146 Analytical Concepts 146 Effects of Impact Fees on Rent and Prices 147 Estimates of the Long Run Burden Distribution 148 Effects of Impact Fees on Homeownership 149 Effects of Reduction in Other Revenues 150 General Excise and Personal Income Taxes 150 Other Taxes 150 Exportability of Fees 151 Economic Efficiency 151 The Efficiency of Impact Fees vs. Alternatives 152 Replacement of Existing Revenue Sources 152 Fees vs. Alternative Sources of Revenue 152 Fairness Under the Benefit Principle 154 The Fairness of Impact Fees vs. Alternatives 155 Other Benefit Principle Arguments 156 Fairness Under the Ability Principle 157 County vs. State Government 157 Housing Exactions Programs 158 Housing Objectives and Means 158 The Meaning of Housing 159 The Long Run Market Mechanism 160 Housing Exactions Programs and Housing Markets 160 Effects of Housing Exactions 161 Efficiency and Fairness 164 Alternative Methods 164 References 166 Footnotes to Text 168 CHAPTER 5 Impact Fees and Housing Exactions Programs: Conclusion & Commentary By Dan Davidson Introduction 171 Ad Hoc Exactions 172 How Hawaii Officials View Development Exactions 173 Governmental Attitude Toward Development: A "Right" or a "Privilege" t 74 Significance of Nollan Case 175 Housing Exactions Programs 176 Impact Fees 178 Limitations of Impact Fees 179 Use of Impact Fees in Hawaii 179 Footnotes to Text 182 CHAPTER 6 Impact Fees and Housing Exactions Programs: 183 Position Statement of the Land Use Research Foundation of Hawaii: Paying for Growth in Hawaii BIOGRAPHIES OF CONTRIBUTORS AND EDITORS 185 FOREWORD Answering the difficult questions of how to pay for the infrastructure required to accommodate growth and how to best provide housing that is affordable to the residents of Hawaii require the concerted and cooperative efforts of both the private and the public sectors. Because of the importance of these issues, the Land Use Research Foundation embarked upon the production of a comprehensive report, P n f r Growth in Hawaii• An Analysis of Impact Feea and Housinq~cactions Programs This reportfocuses upon the best ways to spread the costs of growth among the private development sector, the business sector, government and the general public, for reasons of fairness and efficiency. The report is organized as follows. David W. Rae, a developer and planner, presents a planning overview of impact fees and housing exactions programs in Chapter I. He frames the issues and Includes a set of definitions to assist the reader. Chapter 2 presents the views of eight distinguished public officials on how to pay for growth in Hawaii. Those interviewed were: Harold S. Masumoto, Director, Office of State Planning; Joseph K. Conant, Executive Director, State Housing Finance and Development Corporation; Donald A. Clegg, Chief Planning Officer, City& Countyof Honolulu; John P. Whalen, Director otLand Utilization, City & Counryof Honolulu; Michael Moon, Director of Housing & Community Development, City & County of Honolulu; Christopher L. Hart, Director of Planning, County of Maui; Albert Lono Lyman, Director of Planning, County of Hawaii and Tom Shigemoto, Director of Planning, County of Kauai. In Chapter 3, attorney Benjamin A. Kudo presents a legal analysis of impact fees and housing exactions programs. This chapter is also intended to serve as a comprehensive planning guide and drafting manual for writing an impact fee ordinance. Not included In this report, due to length, is a comprehensive collection of impact fee ordinances, State enabling legislation and federal guidelines, assembled by Mr. Kudo. For those interested in these materials, please contact Mr. Kudo or the Land Use Research Foundation. Chapter 4 is an economic analysis of impactfees and housing exactions by Professor Louis A. Rose of the Economics Department of the University of Hawaii at Manoa. It represents rigorous scholarship and Is critical to the conclusions reached In this report. Chapter 5, by co-editor Dan Davidson, is both a summary of Chapters 1, 3 and 4, and a concluding commentary on the fairness, desirability, effectiveness and legality of impact fees and housing exactions programs. Chapter 6 is the Policy Statement of the Land Use Research Foundation on the issues presented in this report. This Statement reflects the priorities and concerns of LURF's Board of Directors. The final section presents biographical information about the contributors to this report, including the public officials interviewed. The editors wish to acknowledge thefollowing for their special help. First, the contributors, David Rae, Ben Kudo and Lou Rose for their diligence, superior work, and patience with our questions and revisions. Second, the public officials, who made time in their busy schedules to be interviewed for the record in this report. Third, to Maui Counclimember Velma Santos, for providing the Preface to the report, and also for her "trailblazing" efforts in putting together the West Maui transportation impact fee ordinance. Fourth, to Professor David Callies for writing the Introduction to the Report. Fifth, to Stephanie Tanaka for her excellent job in transcribing the interviews. Sixth, to our dedicated secretary, Dayna E. Souza, for her wonderful and tireless work in the preparation and production of this manuscript. And finally to the members of the Land Use Research Foundation who sponsored this research effort. Donna Goth, and R. Brian Tsujimura, the immediate past President and current President of LURF, respectively, were inspirational in their support of this project and deserve credit for their commitment to sound and productive land use and development policies. Dan Davidson Executive Director Ann Usagawa Senior Researcher September 1988 PREFACE by Velma M, Santos, Chairperson Planning and Land Use Committee Maui County Council The publication of Paving for Growth in Hawail• An Analysis of Impact Fees and Housing Exactions Proqfams culminates months of research by the Land Use Research Foundation in evaluating various alternative Infrastructure financing mechanisms. The report is of personal significance because it documents issues and perspectives raised during an eighteen month joint venture between the Maui County Council'sPianning and Land Use Committee and the Land Use Research Foundation informulating legislation which would estabtlsh impact fees In the County of Maul. Confronted with an escalating number of proposals from developers for commercial, residential, industrial and hotel activities, and faced with the harsh reality that the County's infrastructure systems as wel I as its fiscal resources were incapable of accommodating the rapid growth, Maui County, assisted by the Land Use Research Foundation, embarked on an exploration of alternatives to traditional financing sources in early 1987. During that year, a pair of U.S. Supreme Court decisions in First English Evanq~jcal Lutheran Church of Dlendale v Count~gf o Anggl~, and Nollan v California Coastal Commission aroused the interest of municipal governments because of their far-reaching implications on local land use controls. Proceeding with the understanding that land use regulations created by local government entities should substantially advance public interest, the impact fee approach emerged as a financing methodology which offered benefits to both the developer and the County of Maui in a fair and systematic fashion by shifting the costs of new growth from the general taxpayer to the new resident. Maui County's decision to focus on one infrastructure system within a spec'rfic geographic region resulted in an ordinance providingfor an impactfeefor traffic and road improvements in West Maui. By limiting our scope of work, we have been able to pursue an impact fee concept that is manageable and adaptable to other infrastructure systems and other geographic areas. I am optimistic that the impact fee will surtace as the preferred tool to support governmental financing of public infrastructure and services. Pavino for Growth in Hawaii presents a comprehensive analysis of impact fees and exactions, including affordable housing °Iinkage"programs. It attempts to provide a un'rfied package of practi"cal approaches and tangible recommendations which cover the salient features of relatively new concepts. 1 extend special thanks to the Land Use Research Foundation for sponsoring the production of a valuable resource for both the public and private sectors, and to the authors for their contributions. September 1988 INTRODUCTION by David L. Callies* Professor of Law William S. Richardson School of Law University of Hawaii at Manoa Whether it is called paying for growth or allocating costs for public facilities, there is probably no more important policy issue in Hawaii than how to finance roads, schools, parks, sewers, waterlines, and solid waste disposal sites. Equally important is the question of howweare going to housethe growing segment of our population that lacks adequate shelter. It is therefore with an exquisite sense of timing that the Land Use Research Foundation (LURE) publishes Its report, Pavinafor Growth in Hawaii: An Analysis of Impact Fees and Housinfl Exactions Programs. It would be useful to have these issues debated by those who would lead us at the County and State level and represent us in Washington. The LURE study raises all the right issues: WhyareallfourCountlesundertakingsomesortofimpactfeeprogramtofunddevelopment- generated public facility needs? Why is the State levying substantial housing exactions at the land reclassification stage? What happened to more traditional sources of funding for these purposes? Who will really foot the bill? Who's coordinating the process? Is it legal? Will the result make for good planning? Can the development community afford it? The LURE report attempts to formulate some answers by presenting thoughtful analyses from economic, planning and legal perspectives, together with well-focused interviews with key planning and implementation officials atthe State and Coumy levels who candidly set out their views on the effectiveness of housing and public facility programs, for which they are in large measure responsible. P~yinc For Growth in Hawaii is not without a certain perspective. LURE represents the land development community, and it clearly has an agenda in presenting its report. Ad hoc impact fees and exactions are and have been a fact of land development life in Hawaii for a long time, and it is to the development community's advantage to have such levies for land development permits public, predictable, and proportionate to the land development upon which levied. Housing exactions are growing by leaps and bounds, both in size and extent, and it is to the development community's advantage to keep affordable housing demands within the bounds of what they consider to be affordable costs of development. This developer perspective should not detract from stimulating debate on the principal issues--or on the following, also raised in this study: 1. Developer contributions in exchange for zoning and permit certainty through a development agreement would solve most of the legal problems raised in the Report o~~r the connection or "nexus" between housing and other exactions conditions and land development approvals. We have had a development agreement statute on the books in Hawaii for nearly three years. What's holding up implementation at the County level? 2. If it is true, as the Report states and as other State-sponsored reports suggest, that of the approximately one-half of the land area of the State which is presently classified as agricultural, fully 83% is not in active agricultural use, then is either State or private landowner justified in retaining ;~I of it for agriculture? 3. What~gthe costs incurred by land developers in going through sophisticated State and County land use permitting processes? Are they the comparatively negligible price for good planning, or a major deterrent to affordable development, whether residential or commercial? Whether one deals with the costs of public facilities and adequate housing through Impact fees, raw linkage, public subsidies, or increased taxes, the questions of propriety, legality, planning and policy all need to be addressed. The Report is accurate to determining that impactfees and housing exactions are currently with us, and this political season is an auspicious time for their assessment. *Professor Callies is the author of ~oai lating'aradise~ Land Use Controls in Hawaii, among other publications. He Is the Chairman-Elect of the American Bar Association's Section on Urban, State, and Local Government Law. Professor Callies did not participate in the writing of Paving for Growth in Hawaii. CHAPTER 1 Impact Fees and Housing Exactions Programs: A Planning Overview by David W. Rae I. INTRODUCTION AND PURPOSE While the term "Impact fee" is relatively recent, development dedications or exactions have more than a sixty-year history, nationally. In the last four years, the topic of impact fees and their relationship to other forms of exactions has gained national prominence as a planning field of study and Investigation. The evolution of required exactions across the nation parallels the Hawaii experience in most planning respects. Hawaii now stands with an ever growing number of communities implementing various forms of sophisticated development requirements. The general purpose of this chapter is,therefore, to present a plannf ng overview of development exactions, of which impact fees and housing exactions programs are a part. Specifically, this chapter will: (1) Discuss the national history and the evolution of development exactions; (2) Describe in general terms, impact fee and housing exactions programs; (3) Briefly discuss Hawaii impact fee and housing exactions issues and concerns; and (4) Set forth in summary form some conclusions regarding impact fees and housing exactions programs. II. GENERAL DEFINITIONS The following are general and simplified definitions of key concepts and terms, from a planning I perspective. Amore detailed explanation is given in the discussion of specific programs or in other technical sections of this report, such as when legal terms are defined. I 1 Exactions: We are using the new broad definition of this term putforth by the American Planning Association.' Exactions, under this new definition, include all manner of things that are compelled to be given or carried out by a developer as a condition of governmental approvals. This includes impact fees and other cash payments, aswellaslanddedicationsandtheprovisionofpublicfacilities. Someexactions are to mitigate direct impacts of a project such as the construction of an additonal lane to a roadway or the installation of a water reservoir, while other exactions are required in an attempt to address community- wide needs such as the provision of affordable housing. Affordable Housing: As defined by the State of Hawaii's Housing, Finance, and Development Corporation, an umbrella term referring to housing that can be purchased or rented by persons of low (less than 80% of median), low-moderate (80% - 120% of median), or moderate (120% - 140% of median) income. The median income for a family of four on Oahu is presently $36,500. Thus, families earning less than $29,200 as well as those earning between $29,200 and $51,100 are the State's target groups for affordable housing on Oahu. The numbers arelowerfortheNeighborlslandCountiesbecausethemedian income is lower, but the same percentages apply. Dedication: Usually, the transfer of an interest inlandtothegovernmentforsuchusesasschools or parks. The dedications may be in fee simple or may be a lesser interest, such as a public access easement. Dedications may be permanent or temporary. Conditional Zoning: The generally accepted practice of attaching conditions to a zone change for the purpose of mitigating direct impacts of a development project. Courts have held that conditional zoning Is acceptable so long as there is a clear connection (nexus) between the project and the mitigating exaction. The legal authority is much less clear for requiring exactions that address community-wide needs, such as affordable housing. Unilateral Agreements: The document used on Oahu to implement Conditional Zoning. It is "unilateral" because the City and County of Honolulu does not sign the agreement or promise any actions in return. The applicantfor the zone change signs the agreement "unilaterally," and promises to carry out all the conditions that have been negotiated between itandtheCity. Failure topertormpertheAgreement, which is recorded at the Bureau of Conveyances, can result in revocation of the zoning approval. Impact Fees: Single payments required to be made by builders or developers at the time of development approval, and calculated to be the development's proportionate share of the capital cost of providing major facilities. Because they are single payments, as opposed to periodic payments such as taxes, it means that the capital outlay necessary to construct the facility or improvement is available at the time that the facility is needed. Additionally, because the fee is based on a proportionate share, new development will not be required to pay other than its own way. Linkage Fee: A fee charged to a developer for facilities or services that are not as clearly or, at least, as easily related to the development's impacts; for example, large office buildings in Boston and San Francisco are assessed a fee that these municipalities use to construct affordable housing. The "nexus" is less clear and of considerable legal debate in those jurisdictions employing linkage fees. Nexus: Some courts discuss a "rational nexus," while others look to an "essential nexus." From a planning perspective, what is important is that there is a clear and documented connection or link between the impacts caused by a development project and the exactions imposed upon the developer to mitigate negative impacts. Inclusionary Housing: The process of providing affordable housing within the context of a large 2 market-housing development. Off-site production of affordable units or cash in-lieu of units are other options sometimes offered to the developer under such programs. The incluslonary concept may be voluntary with incentives, involuntary as a condition of approvals in an ad hoc exactions program, or required by statute or ordinance. III. HISTORY Prior to the early 1920s, and the inception of development regulations, local government in the United States provided both on- and off-site infrastructure to support development. This was done to induce economic development and was seen as the appropriate role of local government. During this period, some developers would seek subdivision approvals in order to have their land Improved by government, regardless of the distance from existing infrastructure. Government services, as well as real estate developments, were stretched over an ever-growing area. Local governments became burdened by the inefficient costs involved, and citizens began to object to "sprawl.n2 The Standard Planning and Zoning Enabling Acts of the late 1920s were, in part, a result of government and citizen concerns, and their passage marks what some have called the "first generation" of land use regulatlons.3 This Federal guideline served as the model for subsequent development regulation and allowed local governments to require, as a condition of approval, the developer's provision and dedication of all streets, water mains, sewer lines, and other utilities internal to the development. Between 1930 and the early 1940s, local governments found themselves less and less able to finance on- sitefacilities sothat by the beginning of World War I I, most developers provided on-site facilities while local government continued to provide services up to the subdivision. The environmental movement of the Jate 1960s and early 1970s began to question the desirability of growth, and public support for growth funded through general obligation sources began to wane. From 1965 to 1984, the government-sponsored capital outlays for Infrastructure per capita declined from $161 to less than $87.' This reflected a lack of desire to tax at the local level, taxpayer revolts, and a reduction of Federal revenue-sharing. Concomitantly, developer exactions for off-site facilities such as community parks, schools, interchanges, and sewage treatment plants, made upfor the lack of government spending for new construction, while existing infrastructure went without necessary maintenance and expansion. These exactions were generally arrived at through ad hoc negotiations, with the resulting agreements becoming the conditions of the development approvals. The early 1970s also marked what has been called the "second generation" of regulation. This phase (of exactatoryevolution)wasmarkedbygrowthcontrolandgrowihmanagementprograms. Perhapsthebest known of such programs and one of the first was in Ramapo, New York. This program provided a timetable for developing new infrastructure by the City in various parts of Ramapo. Land use permits for new growth were limited by the development of infrastructure. The Development Plan system of the City and County of Honolulu, which seeks to tie land approvals on a land use map with planned infrastructure on a public facilities map, is based on the Ramapo system. During the course of the late 1970s and early 1980s, local governments across the country began to search for ways to shift the costs of new facilities to the developers and occupants of new developments. This marked the beginning of the "third generation" of regulations. The nature of developer exactions broadenedfromoff-site infrastructure to communitycapitalneedsandsocialservices. Suchitemsasday- carecenters, incluslonary housing, and job training programs became common in regions of the country where economies were strong. These exactions were and are virtually unheard of in areas with slow or deteriorating economies. This 3 phenomenon may be due to several reasons. First, economically vibrant areas are often also marked by such things as high growth rates, increased housing costs, and Increased traffic. Existing citizen disenchantmentwith development in general may lead them to feel that developers can afford increased exactions. Development, on the other hand, is generally welcomed without such reservations in deteriorating areas. Second, government has not demonstrated an ability to keeppacewithdevelopment infast-growing areas. Under such circumstances, in order for the growth to continue, developers have been willing to pay the exactions. I n some fast-growing parts of the country, notably Florida and California, developers' willingness to pay ever increasing exactions has begun to wane, as evidenced by increased legal actions and also by development relocating elsewhere. Phoenix, Arizona, for example, represents a growth alternative for many California firms who are paying what they believe to be exorbitant development fees in some areas of California. As local governments, developers, and communities became more sophisticated, the process of exactions became more sophisticated and complex. Ad hoc negotiations were increasingly seen as unfair in that they "hit" the developers of large projects while allowing smal ler projects (the cumulative impact of which could be quite large) to proceed without exactions. Developers disliked the uncertainty inherent in a negotiated process and urban economists began to question its inefficiency. What started as ad hoc and negotiated exactions has begun to evolve into "third generation" and other impact-fee forms of infrastructure cost-shifting. In some jurisdictions, this has also resulted in inclusionary housing programs (of which linkage programs are asub-category). It must be noted that there is much overlap within jurisdictions between second and third generation regulatory programs. Several communities, including San Francisco and Los Angeles, have elements of both growth control and cost shifting. It would be reasonable to expect similar conditions to exist in Hawaii. IV. IMPACT FEE PROGRAMS The planning basis for impact fee programs is simple. It is to mitigate the direct undesired consequences of growth so that the growth may proceed. As previously mentioned, the proliferation of legal cases in Florida and California have led planners and elected officials to consider the "rational nexus" or connnection between the proposed project, any impactfee, and the provision ofthe needed inftastructure. (See Chapter 3 for a detailed discussion of these cases.) The concept of rational nexus is the key legal issue for planners to understand. It has two basic points:5 1. There must be a reasonable connection between the need for additional facilities and the growth generated by the new development; and 2. There must be a reasonable connection between the expenditure of the fees collected and the benefits received by the development paying the fees. When planning an impact fee program, the rational nexus test may be interpreted as folWws:e o Is the program grounded in prior planning and capital programming efforts? Have the necessary studies been done? o Is the proposed infrastructure required by the new development? o Are fees apportioned according to a "fair share" formula? 4 o Are fees earmarked for specific projects? o Will the fees be used in ways that provide substantive benefit for the development being charged the fee? o Will the funds be spent in a timely way? An impact fee program is not a growth control mechanism but rather, a method of guaranteeing that facilities will be available when needed, so that growth can go forward. This is not to say that it cannot or has not been used to control or stop growth. Some communities, seeing impactfees as a new and limitless revenue source, havebecomeverycreativeinthefacilitiesfundedbythem. Thesehaveincluded: potable water, solid waste, sewers, drainage, roads (includingfreeways)end traffic improvements, schools, parks, librarles,fireprotection,police protection, emergency medical services, public buildings, andcemeteries.' Thus, the number of facility costs that could be shifted to new developments could exceed the development's ability to pay, and thereby stop development. Impactfees are single payments required to be made by builders or developers at the time of development approval and calculated to be the development's proportionate share of the capital cost of providing major facilities. Because they are single payments, as opposed to periodic payments such as taxes, it means that the capital outlay necessary to construct the facility or improvement is available at the time that the facility is needed. Additionally, because the fee is based on a proportionate share, new development wil I not be required to pay other than its own way. This also implies that the full cost of the facilities will be apportioned over the development. Where in-fill developments are involved and the impact fee is used to increase capacity or where there is only one developer, the system appears to have few planning or administrative problems. However, when large facilities are required for new urbanization, more than one development may share in the use of the facility. In such a case, H all developments are not prepared to proceed at the same time, the initial project may have to temporarily bear the cost for other projects. One way to resolve this inequity is to establish a system of credits so that the first development will be reimbursed by future developments for facilities they share. Such a system can become complicated, however, and repayment to early developers may depend on forces beyond their control. On Maui, for example, a residential developer was required to dril I a water well to serve Its project. The capacity of the wel I was greater than the project required, but was necessary for the future development of the area. The developer will recoup part of the cost of the well only if and when other projects in the area proceed. Depending on the costand method of financing, the carrying costfor such facilities on developments may be prohibitive. Perhaps a better approach in such circumstances would be for the County to issue bonds in order to raise the needed revenue, and then to use impact fees to pay back and ultimately retire the bonds. An important aspect of impact fees is that they require detailed land use and public facilities planning. Largely, this is because of the requirements of the rational nexus test (discussed previously and covered in detail in Chapter 3). In this respect, impact fee programs have been called "pro-planning." Areas of benefit (i.e., impact) must be established, as well as service standards for each type of facility within the area. The benefit area is fundamental to assure that fees collected from developments within It are spent on facilities thatwill benefit the development paying them. Again, this requirementflowsfiom the rational nexus test. The area may be different for each facility or the same, as long as the determination is based on stated, reasonable criteria. In other words, a transportation impact fee system for Oahu would need to differentiate between a growth area such as Ewe, and relatively stable areas such as Kailua or Hawaii Kai. 5 Facility standards are also needed in order to determine the quality of facility that the new development will require. Facility standards may be: (1) the existing level of service; (2) a service level taken from a recognized source; or (3) a new level derived from studies and reports. If the chosen standard for which new development is to be responsible is higher (i.e., better) than the existing level of service, a plan must exist for remedying existing deficiencies from sources other than the new development. Such a change of existing level of service would also require a sound planning rationale. Fees from new developments cannot be used to remedy existing deficiencies. They may only be used to keep an existing level of service from deteriorating due to the new development. A general formula can be shown for calculating an impact fee for a given facility. An example of a park impactfeefrom Broward County, Florida is provided, which is designed to incorporate planning, legal, and economic considerations. The formula has three basic components, as shown below:° I. Totalcostofparkdevelopmentperdwellingunit. Thefirststepistodeterminewhatthecounty's standards are for parks. In this example, there is a standard of 7.5 acres of park for every 1,000 people. Second, the average household size in Broward is 2.5 persons per unit. Third, it costs Broward County $38,140 for acquisition and development of each acre of park. Given these facts, the total cost per unit of new development can then be calculated as follows: $38,140 x 7.5 = $286,050 per 1,000 residents. $286,050/1,000 = $266.05 per person 2.5 x $286.05 = $715.13 The cost of park development per residential unit = $715.13 2. Determine other revenue sources that contributetoparkdevelopment. Thefunctionofthisstep is to acknowledge that there are other sources of revenue for the park development than the impact fee. These must be taken into account so that the impact fee reflects real costs to government. Such revenues typically come from State and Federal grants, previously collected property taxes on undeveloped land, and future payments of new residents to existing obligation bonds. In Broward County, it was found that State and Federal grants paid for 25% of park costs. There was also an outstanding obligation bond for parks. It was calculated that undeveloped land was paying 10% of the bond debt service through property taxes. Thus the land will have already paid 10% of its park cost. It was further found that a new home will pay $25 per year for the next 20 years toward park bond issues. Revenues can then be calculated as follows: 0 25% of $715.13 = $178.78 (Federal and State grants) 0 10% of $715.13 = $71.51 (portion paid by undeveloped land) o Present value of $25 per year for 20 year = $264.75 (future bond payments by a new house) o Contribution of other sources to park development = $515.04. 3. Amount of impact fee. The impact fee per new dwelling can then be calculated by subtracting other revenue sources from the cost of providing the service. In the park example, this is: 6 Park cost per dwelling $715.13 Less other revenues 515.04 Impact fee per dwelling= $199.99 V. HOUSING EXACTIONS PROGRAMS In general, housing exactions programs are attempts by government to require or provide incentives to developers to sell or rent a certain portion of a residential project at "affordable" levels. Because of their original thrust on affordable housing, linkage programs (which impose a fee or affordable housing requirement on non-residential developments) are included under housing exactions programs in the national literature. Housing exactions programs are often called inclusionary housing programs or inclusionary zoning. These terms are used interchangeablyandonlyaninvestigationofprogramspecifics will reveal what is being discussed. Inclusionary Zoning Unlike impact fee programs, the original plan Wing basis for inclusionary zoni ng is not impact mitigation but rather, community integration. This concept has its origin in the New Jersey exclusionary zoning cases, which established the government's ability to assure that a mix of housing types will be provided throughout the community. The New Jersey cases dealtwith a community, Mount laurel, that had zoning provisions that only allowed large lots. The courts found that such zoning practices by government excluded lower priced homes. The courts held that the zoning codes must include smaller lots so as to provide more affordable housing. Since then, we have come a long way from that original Mt. Laurel notion to the current notion that housing must be priced at certain levels for persons making certain incomes. Inclusionary zoning now refers to those programs that are established by statute and are linked to residential rezonings. As illustrated in the model inclusionary zoning ordinance written by the California Department of Housing and Community Development, their broad objective was to provide a permanent affordable housing stock that was acceptable to surrounding residents, through requirements that were fair to developers. Inclusionary zoning ordinances proliferated, especially in California, in the 1970s. All of these ordinances were mandatory in nature. Many of them have since been replaced by voluntary programs based on incentives and expedited regulatory reviews. This shift awayfrom legislated housing exactions probably reflects several things, among them: (1) increased legal scrutiny concerning the nexus of housing i exactions; (2) little documentation concerning the effectiveness of the programs and increasing literature indicating that they do not work; and (3) changes in the political structure that have seen the removal of pro-inclusionary officials in such places as Orange County, California. Both mandatory and incentive based programs tend to contain the following elements:° o Inclusionary requirements: This spells out the amount or percentage of housing to be provided in the affordable range. Nationally, the range appears to be between 10% and 25%. o Income-eligibility criteria for defining affordability: This defines the maximum annual household income a family can have to be eligible to purchase one of the inclusionary units. Usually this is expressed as a percentage of the area's median income, adjusted for household size. 7 o Provisions for in-lieu fees: Many programs permit developers to pay a fee to a housing fund under certain conditions instead of building units. o Pricing criteria for affordable units: Most programs establish a maximum price on the affordable units. The price is often very close to what the maximum income range can afford, assuming little other debt. o Restrictions on theresaleofaffordableunits: Most programslimittheabilityofpurchasers to sell the units within a specified time so as not to create a windfall for the buyer. Other programs maintain abuy-back provision so as to maintain an affordable stock. o Miscellaneous provisions regarding on-site versus off-site construction requirements: Some programs specify whether or not affordable units must be on-site or off-site. t inkaae Programs Linkage programs are relatively new to the planning scene, beginningwith San Francisco's Guidelines in 1980. The two best known programs are those of San Francisco and Boston. Both are mandatory programs that require the developers oflarge-scale real estate projects to provide affordable housing, Job training, day-care center, or other community services or in-lieu fees as a condition of approval. Six of the eight programs in existence (including San Francisco and Boston) pertain only to non-residential developments.7O The planning rationale for linkage programs is that of impact mitigation, although the connection between the development and the impact is less clear. Proponents contend that in many cases, downtown developments replace affordable housing for other uses. Others contend that large-scale projects drive up the prices of existing housing because they create a housing demand by new workers. Still other proponents maintain that a certain amount of affordable housing and other community services exist as benefits to developers and that since their project will use these benefits, they should be responsible for replacing them. Linkage programs may lie mandatory or voluntary, and they may be linked solely to housing or to a wide range of exactions. Both the Boston and San Francisco programs started as mandatory housing programs; both have evolved into mandatory in-lieu fee programs for non-housing facilities and services. In these programs, asquare-foot fee is changed which is then used In various funds to provide services. The fee is preferred in these jurisdictions because it allows the pooling of funds necessary for large projects, such as urban redevelopment in Boston and mass transit in San Francisco. Some critics of the linkage system believe that they are political responses to issues more properly addressed through general taxes. They argue that local governments provide the bulk of infrastructure to downtown developments at large cost to the taxpayer and that by simply requiring the developments to provide their own infrastructure, government could free enough tax resources to construct affordable housingandprovidecommunityserviceswithouttinkagefees." Whether or notcitizenswouldpermittheir tax dollars to be spent on affordable housing, however, remains to lie seen. 8 VI. HAWAII ISSUES AND CONCERNS Developer exactions have existed in Hawaii for many years. They have included park dedications, water hook-up charges, and inclusionary housing requirements. Some, such as the water charge, are established so that there is no negotiation and all parties know in advance the cost and the availability of the service. In this respect, the water charge resembles contemporary impact fee programs. Other exactions, notably affordable housing, have been ad hoc and negotiated. The Hawaii experience is similar to that of the mainland in terms of its transition from second generation to third generation regulation. The growth control and management programs of the 1970s (second generation) have begun to evolve into infrastructure cost-shifting (third generation). The State as well as the four Counties currently seek to shift both project-specific infrastructure costs as well as community- wide social costs to new community developers and residents. More specifically, the State is very concerned with providing infrasfructure and housing in the areas of West Hawaii on the Big Island and in the Ewa-Central area of Oahu. Imapct fees are one method under consideration. In addition, the State is greatly expanding its ad hoc negotiated inclusionary housing requirement at the Land Use Commission stage of review, from a 10-15% housing set-aside to as much as a 50% "affordable" requirement (albeit at higher income ranges). Hawaii County has a draft comprehensive impact fee ordinance before its Council. The program would apply to thirteen different types of infrastructure from roads to affordable housing. This ordinance is unique in that it combines a housing linkage fee in the infrastructure fee proposal. Maui County also has a draft ordinance before Its Counci! but unlike the Big Island, the proposal relates to only one impact, transportation, and to one region, West Maui. The concept may also be extended to the Kihei and Makena areas of Maui. The City & County of Honolulu has a proposed Community Benefit Assessment ordinance, which resembles abroad-based impact fee and linkage system before the council. There are indications, however, that Honolulu may begin considering a more traditional impact fee system, rather than adoptthe Community Benefit Assessment. WhileKauaiCountydoesnotyethaveaproposedimpactfeeordinance, the County was the first to introduce an environmental impact fee, and is currently interested in exploring a broader-based infrastructure-related system. (See Chapter 3 for additional information about the various proposals.) In order to make the current research as relevant as possible to decision-makers, interviews were conducted with State and County planners and housing officials to obtain their views regarding the provision of infrastructure and affordable housing. The next Chapter contains transcripts of these interviews. Those interviewed are all beginning to look atthe distinction between project-specificfacilities and community-wide needs, as well as methods for financing both. In this respect, Hawaii can learn from the mistakes and successes of other jurisdictions with respect to the two issues discussed in this report, impact fees and housing exaction programs. VII. CONCLUSIONS Impact Fees As previously indicated, impact fees can be constructed so that they are both pro-planning and pro- growth. The land use plan is essentially tied to a public facilities plan. If properly implemented, facilities are thus constructed in a timely manner to accommodate planned growth. Impact fees are not, however, 9 a panacea for the problems of whowill pay for facilities. They can be misused to control essential growth. They also are subject to overuse by municipalities, in that growth can dictate the fiscal plan of a community that becomes too dependent on impact fees. If overused, the cost per unit of housing can also become prohibitive, defeating the growth-facilitating benefit of such fees. Impact fees are a tool to provide funds for infrastructure. But they are only one of many tools. Special districts and tax increment financing are other tools that are being increasingly used used in conjunction with impact fees. The exact combination of tools must be fitted to a community before it embarks on one solution to the exclusion of others. Housing Exactions The only planning criteria by which housing exactions can be judged is their efficacy. Certainly these programs do produce affordable housing visibly made available to groups having difficulty in purchasing homes. This alone, however, does not make them effective. A growing body of literature suggests that these programs, while producing some housing, actually decrease the total amount of housing produced and in fact, increase prices to both consumers offor-purchase homes, as well as renters.'Z If they are not the best way of providing affordable housing or if they actually work against housing affordability, then housing exactions should not be part of our housing and land use policies. 10 Footnotes to Text 1. Frank, James E. and Rhodes, Robert M. (eds.) Development Exactions, Washington, D.C., Planners Press, American Planning Association, 1987. 2. Nelson, Arthur C., "Development Impact Fees," Journal of the American Planning Association, Volume 54, No. 1, Winter 1988. 3. Stegman, Michael A. & Snyder, Thomas P., Paving for Growth: Using Development Fees to Finance Infrastructure, Washington, D.C., Urban Land Institute, 1986. Urban Land Institute, "Development Fee Workshop," unpublished lecture by Michael A. Stegman, Los Angeles, CA, April, 1988. 4. ~ #2. 5. American Planning Association, "Impact Fees: Paying for Growth" unpublished lecture by James C. Nicholas, Los Angeles, CA, January, 1988. 6. I~ 7. 8. Fulton, William, "Exactions Put to the Test," Planning Magazine, American Planning Association, December, 1987. 9. Stegman, Michael A. & Holden, J. David, NonFederal Housing Programs: How States and Localities are Re@ op ndiny to Federal Cutbacks inLow-Income Programs., Washington, D.C., The Urban Land Institute, 1987. 10. Imo. 11. Nelson, Arthur C., "Downtown Office Development and Housing Linkage Fees," Journal of the American Planning Association, Volune 54, Number 2, Spring, 1988. 12. Sternlieb, George & Hughes, James W. America's Housing -Prospects and Problems, New Brunswich, N.J., Rutgers University, Center for Urban Policy Research, 1980. Johnson, M. Bruce (ed.), Resolving the Housing Crisis, San Francisco, CA., Pacific Institute for Public Policy Research, 1982. 11 CHAPTER 2 Impact Fees and Housing Exactions Programs: Viewpoints of Eight Hawaii Public Officials During the months of February, March and April, 1988, the following public officials were interviewed by David W. Fae in connection with this project: Harold S. Masumoto, Director, Office of State Planning Joseph K. Conant, Executive Director, State Housing Finance and Development Corporation Donald A. Clegg, Chief Planning Officer, City & County of Honolulu John P. Whalen, Director of Land Utilization, Clty 8 County of Honolulu Michael Moon, Director of Housing & Community Development, City & County of Honolulu Christopher L. Hart, Director of Planning, County of Maui Albert Lono Lyman, Director of Planning, County of Hawaii Tom Shigemoto, Director of Planning, County of Kauai A common set of questions dealing with infrastructure and housing needs formed the basis of the interviews, although the follow-up questions varied depending upon the responses. With the exception of Michael Moon, who provided written answers, the interviews were taped and then transcribed. Those interviewed were then given the opportunity to edit their transcripts. Upon receipt of the revised transcripts, the editors of this report made only minor stylistic changes. The transcripts are presented in their entirety so that the individual concerns and proposals of the public officials may be fully appreciated. The quotations given special emphasis in the following transcripts were selected by the editors of the report. 13 . HAAO~;p s r~~uMVrQ This interview with Harold S. Masumoto, Director of the Office of State Planning was conducted on Monday, February 29, 1988. HOW WOULD YOU DEFINE THE AREA OF RESPONSIBILITY FOR YOURSELF IN THE OFFICE OF STATE PLANNING WITH REGARD TO DEVELOPMENT IMPACT FEES AND EXACTIONS PROGRAMS? Masumoto: One of our assignments is to raise questions. We need to raise the public's awareness and to anticipate Issues that may arlse. We said that housing on Oahu is going to be a major issue and the questionis,arewedoingenoughandwhoisdoingwhat? That'stherolethatweplayed. Wewentonestep further and said to developers: "Maybe you guys gotta come outwith your share." But I think on that Issue the answer on Oahu is quite clear: we cannot rely only on the private sector. IN PROVIDING FOR HOUSING? Masumoto: Not under present conditions, and government has to do something. Act 111 of 1971 [regarding Ch. 359G, now Ch. 201 E, HRS] is inadequate for present conditions. So this is why we got involved. But then if you look at what causes housing to become available, which is availability of land, infrastructure, interest rates etc.--we have an interest rate program, the Hula Mae program, but people weren't provided houses at that time to qualffy for, and we had a problem. The Governor's position [for the 1987 Legislative Session] was to create an entity thatwould step in if necessary, and that's the Housing Finance and Development Corporation. But then we discovered on Oahu that even if the HFDC wanted to become active, they really couldn't because we didn't own land. SO HAVE THE LAND ACQUISITION PROGRAMS . Masumoto: To be effective. I'm hopeful that the private sector will carry the major load. I think they can because if you look at it, the market Is in the $125,000 to $150,000 range right now. YOU'RE TALKING ABOUT THE EWA AND CENTRAL OAHU AREAS? Masumoto: Right. DO YOU SEE YOUR OFFICE BEING ACTIVELY INVOLVED IN HOUSING OR IMPACT FEES OUTSIDE OF EWA? Masumoto: Not really. WHAT ABOUT THE NEIGHBOR ISLANDS? Masumoto: Right now, we're involved in West Hawaii planning, and have begun to raise questions. If all of those developments happen, who is going to meet the infrastructure costs? Who is going to meet the housing requirements? Who is going to do all the other things that are required? Hopefully, something will happen. The role we have to play is to anticipate issues that will arise in the future. On the Neighbor Islands, I hope the Counties will play a major role, and I would say Hawaii County is well prepared to do just that. 15 YOU'VE SINGLED OUT THREE GEOGRAPHIC AREAS OF INTEREST: CENTRAL OAHU/EWA, WATERFRONT ON OAHU [IN PREVIOUS SPEECHES], AND WEST HAWAII'S RESORT DEVELOPMENT AREAS. DOYOUSEEYOURSELFBEINGINVOLVEDINIMPACTFEESASTHEY RELATE TO INFRASTRUCTURE IN THESE GEOGRAPHIC AREAS? ~~»'~i~f8f9k17>fi', f1 ~ ~8t~' ~~f#~PCllat ~~l++Ct~~ ra ~r ~~a~ ~ ~t~rs ~t~~~~~t~ ~Y ~F~,t ~ ta; ~~t~ ~xn;~~~ t~s ~IVI~i~l ~i~ Masumoto: I see it in Central Oahu. The Waterfront I think is a unique project. The reason for the Waterfront emphasis is our feeling that we were underutilizing the area. The Waterfront area is basically State land. Unless you bring in some pressure from somewhere else, if you leave it up to Harbors, [division of the State Department of Transportation], the highest and best use is still harbor use, and not other uses. Again, our role is raising questions, bringing it to the attention of other people, and saying some things others may not like, such as: "Why don't you think about this kind of approach instead of letting the Legislature decide that?--which is what has been happening up to now. The Legislature decided Aloha Tower should be more highly utilized, so they created the Aloha Tower Development Corporation. Whereas, for Ewa and Central Oahu, we're using our land use powers to Vyand exact housing and all these other things. Frankly, M I had my choice I would rather have a more logical way of doing it, ff we had an impact fee system or whatever it may be. I think that would make sense. WHAT DO YOU SEE AS THE CURRENT CAPITAL INFRASTRUCTURE NEEDS IN EWA/CENTRAL OAHU? Masumoto: Highways are going to be one hell of a mess. We're really creating more of a transportation problem until the job centers become a reality. When the job centers become reallry, then we will be creating traffic mostly in and out. I think it's going to become so bad that people will finally agree to subsidize a mass transit system, although we haven't reached that stage yet. DO YOU SEE YOUR OFFICE BEING INVOLVED IN MAJOR INFRASTRUCTURE FOR TRANSPORTATION SYSTEMS? Masumoto: Probably in the future, but not in the beginning. REGARDING HOUSING, WHAT DO YOU SEE AS THE CURRENT NEED AND FUTURE NEED ON OAHU? Masumoto: I think we have a tremendous housing need: single-family ormulti-family, but not high-rise, because of what people want. [State Representative] Mike Crozier says he knows of at least two families on each streetwhere you have three generations living together. I think he's right. I think we have that kind of built-up demand for housing. There's no question about it. But what worries me is that al I this emphasis on housing developments in Mililani, Waiawa, Kapolei, etc. assumes that this is the lifestyle that everybody wants, and that everybody wants asingle-family home, and that everybody can reach that level. I think 30% of our population is just not going to reach that level. I'm not sure of the percentage, but I know it's high. COULDYOUELABORATEONYOURCOMMENTTHATTHEREARESOMEPEOPLEWHOARENOT GOING TO BE ABLE TO AFFORD HOUSING FOR PURCHASE? 16 Masumoto: We need to figure our a way to subsidize housing in the inner city or primary urban core on Oahu. I think the City is doing the right thing in trying to build up areas like Chinatown, to subsidize housing, building towers, etc. I think that's the right idea, but it costs money. They are going to have to figure out a way to subsidize it. We used to have a lot of Federal money, but it's now drying up. THE OLD'SECTION 8' NEW CONSTRUCTION PROGRAM? Masumoto: Yes, it's all drying up now and someone's going to have to step in. I have a feeling that it's going to be the State. The State and the private sectors are going to have to step in. HOW DO YOU SEE THE STATE TAKING CARE OF THE LOWER-INCOME SUBSIDIZED SEGMENTS? Masumoto: I don't know. The one scenario that Isaw--and we put it on the table--was the possibility of letting developers of large suburban tracts of land buy their way out of affordable housing--in lieu fees-- andput it Into a central fund and create our own community block development programs. THE STATE WOULD ACTUALLY DEVELOP THE HOUSING? Masumoto: State or County. I have no problem with the County taking over the primary urban core. t~8Y~9~~f~'~~~`~~~?~ rxtC3~ i~~Y~4t~~ ~0~~~ ~>XIfB r~#ISI~'t;t ~t~#~te~ ~~1! ~ttal~~~~s ~tf~t~;t~~" t1VHl'}r;~1 ~~~f'i£ ~If9t~~r~;#>t~ ~f ~~~kY ~~#~~lp~#±>~ tilt..wl~ern~~rt;l~#.1n~ert~~;~tlrar~ THERE IS AN ECONOMIC THEORY OF FILTERING IN THE HOUSING MARKET, SOMETIMES CALLED'TRICKLE-DOWN.' DOYOU SEE THIS WORKINGATALL IF NEW HOUSING ISCREATED IN THE FORE-PURCHASE AREA? DO YOU THINK NEW UNITS WILL BECOME AVAILABLE FOR THE LOW END? Masumoto: I'm not enough of an economist to have a strong opi nion of that, but I would think that it would be true. The problem is that private developers wil I not develop the homes ff the margin isn't there. If you make the assumption that there will be atrickle-down, it will do so only if there is enough of a profit margin. At some point the profit margin is going to be so small that everybody's going to step out of the market, and then there won't be any new production. That's a problem we will have to face. I anticipate that governmental Intervention is necessary. How we're going to do it, I really don't know. We haven't been able to pick up enough suggestions, or enough haven't come in yet. HOW DO YOU SEE CURRENT INFRASTRUCTURE NEEDS BEING MET? Masumoto: Haphazardly. It'samess. SenatorLehuaFernandesSallinghasabill[inthe1988Legislative Session] in which she said that the Land Use Commission in their decisions and orders shall accept the recommendation of any State intervenor and if they don't accept them, to state in their findings why they cannot, and what provisions of the law prevent them from accepting them. I think she was Vying to make sure that when the Transportation Department asks the housing or resort developer to put in this road or this interchange, the LUC would require them to No so. That's the way I interpreted the bill and therefore I testified against it. I said I really couldn't understand the bill because right now, the State intervenor is the Office of State Planning--DBED [the Department of Business & Economic Development], or the Land Use Division of DBED by law--and all the other State agencies go through this one agency. So I testified 17 that this was ambiguity number 1. Ambiguity number 2 is that if the purpose of the bill is broader than that, then it really is an impact fee bill. I don't think we studied the issue well enough. I don't know what the answer is. We really need to determine that. I don't know where we're going to end up on this particular issue. ~~+~as, ~~aj~~any~~ri~r~~ta;~t~~~~~~w~ii*'~g~s~tn~ WHAT KINDS OF IMPACTS REGARDING EITHER HOUSING AND/OR CAPITAL DO YOU SEE ASSOCIATED WITH RESORT DEVELOPMENT? SPECIFICALLY, WITH RESPECTTOYOURAREA OF EXPERTISE IN WEST HAWAII? Masumoto: They are going to create jobs, and when you create jobs you are going to need housing. Because there is going to be a tremendous in-migration. SO HOUSING IS KEY THEN TO THE IN-MIGRATION? Masumoto: In West Hawaii there is no question about it. There is going to have to be in-migration of employees and I think any job creation on the Big Island, the West Hawaii area, will have a housing component. Yesterday's newspaper talked about the Cal Tech telescope on Mauna Kea and their biggest problem, which is housing in Waimea for employees. They're creating a market for housing. It's just that the housing isn't out there, which is no differentfrom what Itwas fifty, one hundred years ago. That's why we had plantation camp housing. HAS THAT BEEN THE CASE OVER THE DEVELOPMENT HISTORY OF WEST HAWAII: RESORTS BEING BUILT, FOLLOWED BY A HOUSING NEED? Masumoto: I don't think that's quite true. When Mauna Kea Beach resort came in, for Instance, therewas enough unemployment that they could use the labor pool there to fill a lot of the jobs, but now we have reached the stage where the unemployment is so low. SO YOU SEE THE HOUSING ISSUE AS BEING RELATED TO THE AVAILABILITY OF LOCAL LABOR? Masumoto: Yes. DO YOU THINK THAT THOSE fMPACTS ARE BEING ADDRESSED NOW BY THE PRIVATE SECTOR? Masumoto: They're being forced to. One story I've heard is that the Mayor [Dante Carpenter] told Hyatt Waikoloa, "You're not going to get your Certificate of Occupancy until some commitment of housing is made." So that'swhat they are talking about--the County receiving over 300 acres of land in Waikoloa [for housing]. WOULD YOU SAY THAT THE NATURAL MARKET FORCE IS NOTABLE TO RESPOND TO CREATE THE HOUSING NECESSARY AT THIS POINT? Masumoto: I've seen proposals, but again, they all seem to require government assistance. For instance, Mauna Lani--the one that just opened up on the hill--has a large government subsidy [for its employee housing project]. On the other hand, I've seen one developer come in and say, "Glue me the rezoning and I'll put up support communities for you." So my question to the developer is: "Okay, what kind of level, what prices are you going to be charging for your homes?" Well, I haven't seen the figures yet. I just don't t8 think he can meet it. I don't think the jobs and salary levels can match the mortgage payments. DOYOUTHINKALLTHENEWHOUSINGSHOULDORNEEDSTOBEFOR -PURCHASE WHEN YOU SAY 'MORTGAGE PAYMENTS'? Masumoto: Or even for rental. Look at it this way. The average wage in West Hawaii, I understand, is about $26,000 for a family of four. Let's say they don't report all of their income. So let's say we give them thirty or thirty-three percent more income. About $35,000 - $36,000 times three, or about $100,000, $105,000. We've got to get asingle-family detached home for $105,000; H not, we have a problem. WHAT KINDS OF IMPACTS DO YOU SEE ASSOCIATED BOTH WITH HOUSING AND CAPITAL INFRASTRUCTURE AND WITH COMMERCIAL OR INDUSTRIAL DEVELOPMENTS? Masumoto: I see the same thing, but less. For instance, Maui County was telling C. Brewer that they ought to make a study of their industrial park. Industrial parks, I look at differently from resorts. A resort comes up--they have to have a critical mass of four hundred hotel rooms or four hundred rooms plus fifty condo units. All of a sudden you bring in a lot of people. Whereas in an indusVial park, you assume that the growth is going to be a little slower, so it's not going to happen that way, or the tenants are going to relocate from elsewhere. Now, if you're telling me that General Motors is bringing a plant here, then you will have an impact. SOAGAIN, YOUARETALKI NG ABOUTTHE SCALE OF DEVELOPMENTSAS ITRELATESLARGELY TO NEW AND . Masumoto: Scale and in-migration of labor are the key issues. WOULD YOU SAY THAT THAT'S TRUE FOR BOTH CAPITAL KI NDS OF INFRASTRUCTURE, SUCH AS ROADS, AS WELL AS FOR THINGS LIKE HOUSING? Masumoto: Schools, and all others. So many more hotel rooms require so many more employees, so manyemployeesrequiresomanyhouseholdunits,etc. Everyone has thelrownformula. Idon'tknowwhy we seem to be using this certain analyst's figures for West Hawaii, but that's what we're using as of now and no one has challenged us on it yet so far. SO IS THE MULTIPLIER PER HOUSING UNIT... Masumoto: For housing units and people, etc. The Department of Education then takes the household and says that if you're in a resort-type area, the distribution of the school-age student shall be such and such. I~11$l~~clrf[3t"i~f€iwll`~+19<t~t~~#f1~8It~~ la"~l~k`~~#~l~`~ IN TERMS OF RESIDENTIAL DEVELOPMENTS, WHAT KINDS OF IMPACTS DO YOU SEE ASSOCIATED WITH THOSE, BOTH FOR CAPITAL AND HOUSING DEVELOPMENTS? Masumoto: I think transportation needs, parks, governmental services. They use governmental services, but on this island, [Oahu), I think traffic is going to be the worst. DO YOU SEE THE CREATION OF NEW RESIDENTIAL COMMUNITIESAS CAUSING A NEED FOR AFFORDABLE HOUSING? 19 Masumoto: No. They're just not meeting the need for affordable housing. I think that's the difference. THEN WHAT WOULD BE THE LINK, IF THERE IS ONE OR IF THERE IS A NECESSARY ONE, BETWEEN THE CONVERSION OF LAND FOR RESIDENTIAL DEVELOPMENTS, SAY IN CENTRAL OAHU, EWA, AND A REQUIREMENT TO PROVIDE AFFORDA$LE HOUSING? Masumoto: I've said this in Octoberwhen I started looking at ail of this. The developers and landowners have given us an opportunity. We have about 6,000 acres being proposed for urbanization, and we really don't need 6,000 acres urbanized. We would probably need 2,000 or 3,000 - 4,000 in the next ten years. So the question is which 2,000 or 3,000 - 4,000 acres should we urbanize and I think the answer is that parcel or that proposal which meets the public need, which Is housing. Affordable housing. What we're really threatening developers and landowners with right now, is if you guys won't do it, then we'll do our own, as in Kapolei. SO THEN YOU SEE THE STATE'S ROLE AS . Masumoto: As a catalyst. Getting something done. I think the State shouldn't get involved if the private developers can meet it, but I don't think the private developers can or want to. Like I said, the profit margin may just not be enough. When you ask a developer how do you set your home prices--I was so naive at the beginning, I thought they would say, "We look for a ten percent profit margin" or "This is what I price my home to." Instead, the answer was basically, "What the market would bear." Of course, they have a bottom line. If they can't make the fifteen percent, they won't take the risk. But if they can make forty percent, they'll take the forty percent. WHAT DO YOU SEE AS THE DEVELOPER'S FAIR SHARE IN TERMS OF PROVIDING FOR, SAY, TRAFFIC SOLUTIONS TO CENTRAL OAHU OR WEST HAWAII? Masumoto: I haven't thought about it. I really don't know what the answer is. I'm really begging off on this impact fee issue. I haven't even thought through what the developers' responsibilities are, and what the general taxpayers'responsibilities are. I haven'tthought thatthrough enough yet, myself. On the other hand, just as I have said before, I do think the impact fee system is or can be fairer. I think more equity in the system, rather than the ad hoc system we have now, is desirable. "..t~xlncr#3mt~r>'tl~n~lrr~t`~gm#>g~l#b~8t~+~8~i~f red~xCi~+g ~~sa~!' ft~+es. ; At't~t ~`~PrBr W'~!Y " .Vet's ratti8 w~ly,,Rf ~sttJng Ptt~`r~f~rutwt~ #BSt.' WILL YOU BE LOOKING AT AN IMPACT FEE SYSTEM FOR THE WEST HAWAII AREA AND THE CENTRAL/EWA AREA? Masumoto: We were trying to accomplish that through the Governor's authority bill [SB 3425/HB 3592 joint State/City community development agency]. I thought that we could say that this is a development area like Kaka'ako, make assessments and maybe even more towards tax incrementfinancing which might be a fair way of going in the long run. I thought it made sense, but the [Honolulu City] Council didn't Tike it so we just dropped it. But it seems to me that tax incrementfinancing might be a way of reducing impact fees. And a fairer way, but they didn't go for it. That's one way of getting infrastructure in fast. Now, on our West Hawaii plan, I guess you must have heard of the proposal for subregionai planning. We're suggesting that the area between Kailua and Ke-ahole Airport be considered the subregion and that Hawaii County take the leadership position for its planning. Our position from the land use side, and the State's interest side, is that we are assuming that the whole area is going to be urbanized. On where the 20 industrial parks are going to be located and where the housing is going to be located, etc., I think the County should be more than equal, and in fact should take the primary role. But they don't have the money, so it seems to me that the development authority will make sense. I think that's what we're going to do; otherwise we can't afford the Infrastructure cost. WHATABOUT FUTURE PLANS FOR HOUSING CREATION? HOW DO YOU SEE THAT WORKING IN TERMS OF AUTHORITIES? Masumoto: I don't think we need to worry about It. For major State projects, HFDC has enough authority. They've got enough legal status to do what they need to do. I think it's a coordination problem. YOU MENTIONED ONE POSSIBILITYTHATDEVELOPERS MAYBEABLETOBUYTHEIR WAY OUT OF HOUSING EXACTIONS. HOW WOULD YOU SEE THIS WORKING? Masumoto: I don't know. On Oahu, for the development proposal pending before the Land Use Commission [Mililani Mauka project], I suggested that after they provide the first increment, the 60% [affordable housing requirement] thatwe're looking for, that in the second incrementwe still applythe 60% criteria, but that they be allowed to relocate their affordable housing requirements on other parcels of land or more preferably, buy their way out. We would let the City Council decide that. WOULD THAT BE AN IN-LIEU FEE? AND THE CITY COUNCIL WOULD THEN ESTABLISH WHAT THAT FEE WAS? Masumoto: And letthe City Councilor Housing Finance and Development Corporation decidewhere the money goes. My prediction is that we're going to reach the point where we're going to need that type of funding. We're going to reach the point where we're going to need money to put up more high-rises or heavier density units within the primary urban core, and I don't see any financing for that. Right now all projects such as those are being developed with community block grants from the Federal government. WHICH IS SLOWLY DRYING OUT. Masumoto: Yes, which is slowly drying out. I see that as being the next area of concern. I don't know whether the City is worried, but the City's not in a position to do anything about it. That's the sad part about it, unless they are willing to put the exaction on Waiawa. There are some funds available in Kaka'ako. My understanding is that two apartment buildings have just come up. So there's a couple of million dollars sitting in some fund that's available for a project in that area. FOR AFFORDABLE HOUSING? Masumoto: For affordable housing units in some project. ARE YOU CONCERNED THAT THE COST OF EITHER IMPACT FEES OR HOUSING EXACTIONS WILL BE PASSED ONTO CONSUMERS? Masumoto: I don't think there is any question. YOU THINK IT WOULD? Masumoto: The developers and landowners are in there for profit, so they're going to pass on whatever they can pass on. It's a concern, but what can we do about it? SO THE QUESTION IS . Masumoto: The question is who are the consumers? On housing, the consumers are the local people. On resort development, who are the consumers? I don't think it bothers me one bit if the Westin Kauai raises hotel rates by $2.00 [to cover the passed-on costs]. 21 "(~~`I~MrS+~~yl"~#~yCfB~f~l~~.y~~11'#~~C~ pffy~~l3 ltt+~~#~yy+l~plty7~~` s~~ ~T~~~#i ~~,GI ~f ~1 ~~~Rr~.. ~lff~s i,~4~~ P~'i9 T'F~~ ~>Bt ~~tll/~t i~~~~~$~..~ t~Ytl;l~t.;j:7~i!"~Kr~~tr tot #~'f?spfit"[a~Itt+~Xl!3 wh~~ jrl`~3~Y" ~c~r ~>t~ ~ lft7~r ~#G/1 tl!t~t*3 tiW'f~33`B jt't~t? : prp~#~~. YOU SAID JUST NOW THAT THE HOUSING CONSUMER IS GOING TO BEAR THE COST OF EITHER AN IMPACT FEE SYSTEM OR A HOUSING EXACTION PROGRAM, YET IN SPITE OF THIS, DO YOU SEE THAT THESE ARE GOOD PROGRAMS TO CONTINUE? Masumoto: Idon'tthinkwehaveachoice. Whatotheralternativedowehave? Evengovernmentisdoing that, for example, Kapolei. Well, let's take the City's West Loch project. Their argument is that they have to go with forty percent [of the housing units] at market. Why? They're raising the market prices so they can subsidize the affordables. The City's doing it. At Kapolei, it's the same thing. They're making a $15,000 or $20,000 profit on the market units, and then subsidizing the affordables. In a private development, instead of a $15,000 mark-up, it will be $70,000 because they want to make a profit out of it. WHO WOULD YOU LIKE TO SEE BEAR THESE COSTS, ASSUMING THE PROGRAM COULD BE STRUCTURED DIFFERENTLY? Masumoto: If we could figure out a way where everyone pays for their own cost, thatwould be the logical play obviously, but we know economically it's not feasible at this stage. IN TERMS OF . Masumoto: In terms of building and putting a home on the market: a person can't afford to pay 100%for that unit. DOYOUTHINK THATAN IMPACT FEE OR HOUSING EXACTIONS PROGRAM SHOULD APPLY TO ALL SIZES OF DEVELOPMENTS, LARGE AS WELLAS SMALL? Masumoto: I don't know what the answer is. That's why we're not testifying on some bills. There was a bill placing an exaction on anything over sixty units, I believe. I don't know what the answer is. I haven't thought about it enough. WHAT ABOUT AN IMPACT FEE SYSTEM FOR AN ITEM SUCH AS TRANSPORTATION? Masumoto: I think it would be fair to charge everyone H there is an increase of density or change of use. WHAT ABOUT THE TYPE OF DEVELOPMENT? Masumoto: I think you have to take that into consideration too. That's why the impact fee is so difficult to establish. All of these separate formulas for different things and different uses. Theoretically, impact fees make a lot of sense and everybody can buy it. It's when you get down to the fine points, what percent for transportation, what percent for this and how much--that's where you get into a problem. Defining the relationship. What "nexus," as they put it. That's where the problem is going to arise. That's why I like the development authority idea. It's in a certain geographical area; it gives you an option other than impact fees. It might give you the option of tax increment financing or whatever it may be, a combination. Otherwise you will have to rely on impact fees. 22 .l pir,~dtf~i~ t#~~t~ #rt;i~ Ithf~ t~lliG~ae~f~~~~''~ ~~a1~ to~rtd~'fwrli~~°~9' ~tt7#`~~ ~~19t~vY l?~r~ Ylr~~ ~k ~~#8^ ~`fX/~fi'~ f~~ X61 ~4+f~f;l?~!.!r#St~ WHAT CONFLICTS DO YOU SEE BETWEEN STATE AND LOCAL GOVERNMENTS REGARDING THE ESTABLISHMENT OF THE IMPACT FEE SYSTEMS? Masumoto: I see tremendous conflicts, but I think we ought to face it. I think your study and Hawaii County's--If Hawaii County ever finally takes out their study and takes it to third reading of the ordinance- -willforce us to look at it, or the State will have to assess its own impact fee. For instance, they have a transportation impactfee in the Hawaii County impactfee proposal. The question is what's the nexus between the County's transportation requirements and a development, versus the nexus between the State's transportation requirements and the development? It seems to me a new development in West Hawaii creates more impact on the State highway system than the County's because the developer puts in their own subdivision roads, or resort area roads. It's the connection and use of the State's Queen Kaahumanu Highway that is going to be impacted, but yet the County has proposed an impact fee for transportation in their ordinance. We need to clean it up. I don't know what the answer is. I have a feeling that next Session, if you people finish your study by June or so, we are going to have an interesting time on this issue because I predict that from the developer's and landowner's point of view, they want aState-wide system, aState-wide statute setting the limits. WHY WOULD YOU THINK THAT? Masumoto: Otherwise, you're going tohave afree-for-all among the Counties, and between the Counties and the State, and you might get tapped twice for the same issue. In other words, the landowners or developers would still be at the mercy of the State and the County. The County would have a transportation impactfee, but the State would come in and say "Yes, but you still have to pay forwidening this road, or put in this interchange here, etc." SO THERE MAYBE SOME OPPORTUNITIES FOR COOPERATION IN STREAMLINING BETWEEN THE STATE AND COUNTIES? Masumoto: Yes definitely. MAYBE THERE WILL BE SOME OF THAT NEXT SESSION IN A STATE BILL? Masumoto: I would imagine, that as a result of your study someone is going to propose it [next Session]. WHAT ABOUT HOUSING PROVISION? DO YOU SEE THE SAME KINDS OF ISSUES THERE OR DIFFERENTISSUESWITH REGARDTO STATEANDCOUNTYROLESAND POSSIBLECONFLICTS OR STREAMLINING? Masumoto: I can see the possibility of streamlining it. I can see, like in Hawaii County, I don't think the developers are going to have any problem between the State and the County because we are working together. Scott Leithead [Hawaii County housing administrator] is In here three times a week telling us, "This is what we're going to require and what are you guys going to do?" They have been showing me on the land use maps the things they are planning. If we have any problems, then we talk. [County Councilman] Takashi Domingo meets with us often too. 23 '1'/QW~9'if'lgj ~XHf"i~>~C?tl$ 8f8 ~ ~~'J~~}2~~~' 1!I~~ti~ ~~t$ Sta~6l i1S~ .~rttr~x~i&s~i~x~ {t'S #~i3~ th~r ~t tfl~~l dtftl~~~tx~~~ f'S ~n s~~pe ~tlrt~! ftt~~'t;lit~t~t'. " IN TERMS OF THE EXACTIONS PROCESS, WHERE THE COUNTY HAS IMPOSED SOME SORT OF CONDITIONAL HOUSING EXACTION AT REZONING, AND NOW THE STATE IS . Masumoto: That's a wrong assumption. That's where you guys are wrong. Everybody thought housing exactions were primarily a County issue. What I started doing is going through the Land Use Commission decisions and orders. Housing exactions are a tradition with the State Land Use Commission. It's been there a long time. The difference is in scope and number--amount of units, percentages. For instance, in the West Beach case, the Land Use Commission's decision and order stated: "Petitioner shall provide housing opportunities for low-and moderate-income Hawaii residents prior to assigning or transfP•ring fee simple interest to be acquired of the property by offer for sale, etc. A number of residential units equal to ten percent of the residential units, plus ten percent of the resort residential condominium units not operated asfull-service hotels, to be developed on the property, or in the alternative, allow the land to be acquired by the petitioner. Preferential residential units shall be offered for sale at prices not exceeding prices that enable such purchasers to qualify for and obtain State assisted financing, e.g., bona fide Hula Mae." They have had the practice. If you look at West Beach, the State's ten percent affordable housing requirement is either on-site or somewhere else. They want housing units. The City, when they went through zoning, said "You can pay $9 million; you can put the housing on-site or pay $9 million dollars." The stricter requirement of the Land Use Commission is going to apply. They have to come up with ten percent housing units either on-site or off-site. SO YOU THINK THE LAND USE COMMISSION RULING ON THAT CASE WOULD APPLY, AS OPPOSED TO WHAT THE CITY DID? Masumoto: Well, they can't buy their way out. WHO DO YOU SEE IMPLEMENTING THESE KINDS OF PROVISIONS? Masumoto: If it's a land use provision, then the Land Use Commission should do it. They're the oneswho placed the requirements. WOULD YOUR OFFICE BE REVIEWING COMPLIANCE WITH THE LAND USE COMMISSION? Masumoto: Yes. WOULD THAT BE HISTORICAL ONES SUCH AS WEST BEACH, AS WELL AS FUTURE ONES? Masumoto: I've gone back four or five years and I've reached the conclusion that the Land Use Commission has a lot of affordable housing unit requirements. WHEN THE LAND USE COMMISSION HAS IMPOSED REQUIREMENTS, THE COUNTIES HAVE USUALLYTRIEDTOADMINISTER THEMTHROUGHTHEIRHOUSING OROTHER DEPARTMENTS INPUTTING IT IN REZONING UNILATERAL LANGUAGE. DO YOU SEE A POTENTIAL CONFLICT BETyyEENYOURSELFANDTHECOUNTIES IFYOU'RE GOINGTOBEGINTOADMINISTERTHESE REQUIREMENTS? 24 Masumoto: I think the stricter of the requirements will apply and there is going to be conflict. So this needs to be resolved on an island-by-island basis. We all have to sit down together and reach a solution. I think in the final analysis, there will be aState-wide statute. I predict this because politics being what it is, we won't be able to reach Consensus or concurrence in all Counties. WHAT ROLE DO YOU SEE THE PRIVATE SECTOR PLAYING DURING THIS PERIOD OF POTENTIAL CONFLICT BETWEEN THE STATE AND COUNTIES? Masumoto: I feel sorry for the private sector. They get bounced around. At least they know where the State's coming from right now, so nothing should be a surprise anymore. DOYOU THINKTHA7IFA DEVELOPER AGREED TO, SAY, HOUSING EXACTIONSATTHE STATE LEVEL, THAT THIS SHOULD SUFFICE AND THAT THEY WOULD NOT BE SUBJECTTO FURTHER EXACTIONS AT THE COUNTY LEVEL? Masumoto: I personally don't have a problem with the County putting refinements on them. I don't think it's fair for the County to exact 70%, for instance. On the other hand, if within the 60% they want to state "10% shall be so and so, and 10% shall be so and so," I have no problem. SO YOU SEE THEM BEING ABLE TO DO THE SPECIFICATIONS? Masumoto: Right. If you look at what the State did, it said, "We have a big problem; private sector you have to do your share. Here are the broad parameters under which you should do your share." If you'll review our submission to the Land Use Commission on Mililani Mauka, you'll note that we didn't even put the preferential basis in it. We just said provide houses at this price level. YOU'RE NOT SAYING THAT SO MUCH SHOULD BE AT A CERTAIN LEVEL? Masumoto: No, we're saying that 30% of the units should be priced for families earning 120% of the median income or below, and 30%of the units should be pricedfor those between 120%and t 40%. We're not saying it has to be offered for thirty days on preferential basis for families of such and such income. This is wherewe're making the assumption that if enough homes were put on the market there will be some trickle-down. In other words, people with 135% of the median income can buy a home that's priced for persons below 120%. Whether there'll be enough homes to put on the market and they'll have some spillover. And then when developers will discover that they can make money off those things. IN PUBLIC STATEMENTS, YOU HAVE SAID THAT SUPPLY IS A CRUCIAL ISSUE IN GETTING ENOUGH HOMES ON THE MARKET. WHAT ROLE DO YOU SEE THE STATE TAKING IN ENCOURAGING ADDITIONAL SUPPLY? Masumoto: Making land available and putting infrastructure in. That's the State's role, I think, and financing. YOU SAID 'MAKING LANDS AVAILABLE.' IS THAT THROUGH THE ZONING PROCESS OR THROUGH STATE CONDEMNATION AND THEN RESALE? Masumoto: Resale, like at Kapolei. I would imagine the homes are going to be put up by the Gentrys and the Hirano Brothers and the Mililani Towns or the Amfacs. What will happen, hopefully, is that we will acquire the land, master plan 890 acres, put in Phase I of 200 acres or so, then ask who wants to do it. WOULD YOU SEE BEYOND THATAS BEING FAIRLY WELL DETERMINED OR WOULD THERE BE THINGS LIKE BUY-BACK PROVISIONS? Masumoto: I think for HFDC projects, there will be ten-year buy-back provisions. WILL THAT BE TRUE OFALL OF THE LANDS THATYOUACOUIREAND THEN TURN OVER TO THE PRIVATE SECTOR? Masumoto: I don't think we've talked about it. But HFDC has Certain statutory obligations, and I think the 25 buy-back is one of them. ARE YOU CONCERNED AT ALL THAT THE STATE'S INTERVENTION OR MOVEMENT INTO MARKET HOUSING CREATES A CONFLICT BETWEEN ITS ABILITY TO ZONE AND ITS ROLE AS A DEVELOPER? Masumoto: I see a conflict. I think it's a conflict. The question is, if the State doesn't do it, who is going to do it? Someone is going to be looking at impact fees because it is going to be an issue. I think it's fair. I've been watching what's been happening and the equity issue bothers me quite a bit. YOU SEE THE PRIMARY ISSUE AS BEING TRANSPORTATION? Masumoto: Definitely. Transportation is going to be a big, big issue on Oahu and on the Neighbor Islands. Transportation is one of those that crosses jurisdictional Ifnes, State and County. I think schools will not be an issue: it's primarily the State's responsibility. 26 JOSEPH 1C. CONAN'T This interview with Joseph K. Conant, Executive Director of the State Housing Finance and Development Corporation was held on March 15, 1988_ IN YOUR RECENT PRESENTATIONS, YOU HAVE HAD SOME VERY GOOD DATA AND I'M CURIOUS AS TO WHERE SOME OF THE NUMBERS CAME FROM. PERHAPS WE COULD BEGIN WITH THE ESTIMATED CURRENT SHORTFALL OF 20,000 HOUSING UNITS AND THE PROJECTED DEMAND DATA. Conant: Weworkedwith DBED's [State Department of Business and Economic Development] statistical branch and looked at the new households from 1980 to 1986. We estimated that the [State] population in '86 from DBED sources was approximately 1,062,345 and we deducted group quarters from that, the reason being that if we look at the demand and if units were being placed on the market today where we have overcrowding, how many of those families in an overcrowded situation would be moving out to buy or rent? We felt that very few of them would because take, for example, people living in the Waipahu area and much of the Kalihi area where you have extended families, in some cases, two or three families occupying a unit. They are living in that lifestyle because they like living in that lifestyle. So we don't think that they would impact that much by moving out of that household arrangement into new housing arrangements. So we deducted group crowding to purify the population estimates that we were using. Then we looked at the estimated households in 1986 and deducted that, plus the households from the 1980 census, and came up with new householdsfrom 1980 and 1986. Then, we looked at the new housing units from 1980 to 1986 and from that we had a starting point of the residential units that existed, based on DBED's data. Housing units estimated at 348,004, and less resident units in 1980 gave us new resident unit numbers from 1980 to 1986, and then the production shortfall. We looked at new households from '80 to'86 which was established at about 45,628, less the new units from 1980 to 1986 which was 25,400, to come up with a production shortfall between '80 and '86 of 20,202. WHERE DO THEY ESTIMATETHATTHOSE20,000HOUSEHOLDSARECUARENTLY? IN OTHER WORDS, HOW ARE THEY CURRENTLY SOLVING THEIR HOUSING PROBLEM? Conant: In some cases there is doubling up; in some cases they're occupying substandard units and in other cases they are paying more than 30% of their adjusted gross income for rent. WOULD THAT APPLY TO ALL INCOME SEGMENTS WHEN YOU SAY MORE THAN 30%? Conant: This would apply to income groups that are 140% of the median income and below. About seventy percent of the 20,000 would fall i n that category, so it would be roughly 14, 000 or so, and the other 6,000 would be market units. HOW MANY OF THOSE PROJECTED UNITS ARE BASICALLY BECAUSE PEOPLE ARE CURRENTLY SPENDING TOO MUCH ON HOUSING? Conant: We probably have that breakdown. I don't have that figure right now, but that group was considered and we also looked at the number of units that would be demolished over that period of time. There are some dilapidated units that would not be repairable. 27 HOW DID YOU DO THE FUTURE PROJECTION? Conant: We did the future projection by looking at the estimated households in the year 2000, using DBED's M-F series population projection, which comes out to 1,267,900. Again, we subtracted 4%for group quarters, which then came out to 1,217,184. We divided that by three to look at an average of three persons per household, and we came up with 405,728. Then we looked at the housing production requirements. From this estimated household number for the . '.Ith$ tC)t$t @3t1'CtBtBU trotts#!3'g rlE3BCf ta!,y the year 2~0#~ wvf~J4ttten be ~4+~ut ~~,~o~ f+<r,~ts~. . .i~!rd~btt~ ~rnits wctula[ be uti~ut 7~i'96 of t>~~x . It~r~reY"' ' year 2000, we deducted the 1986 residential housing stock and came up with new housing units to be about 57,724. Then we added in demolition replacement equal to the 1980-1986 average, which was about 7,800, resulting in production needs by the year 2000 of approximately 65,240. Therefore, the total estimated housing need by the year 2000 would then be about 85,000. We estimated the production shortfall from '80 to '86 at about 20,000. When coupled with housing production requirements by the year 2000 of 65,000, about 85,000 in round figures would be our total estimated needs. This includes market, as well as affordable units. Affordable units would be about 75% of that figure. Seventy-five percent would be about 60,000 units for income groups 140% of the median and below. One hundred forty percent right now is a family of four that makes about $47,000 a year. It's recently been changed, but I'm giving you the most recent median income, which was $34,100 for a family of four in the City and County of Honolulu. [Editors' Note: HUD's most recent median income figure for a family of 4 on Oahu is $36,500.] YOU'RE SAYING BASICALLY THAT THERE IS A NEED FOR NEW HOUSING IN THOSE PRICE RANGES? Conant: That's right. We are talking about new housing. « ./t! 8~7;p~8r8 t~{ailgh 1"rti'Slir~ 18`1#`1 ;fit /Qt t## ~llpri! b~i~tg m8ltit+8 1n t~~l9st3 are~l~ end t>#f~lt SQ1~8 the derteltfp~rs~, ,t1~ ptrt it blt~~7t1y, ~r8 st1#! drpp~QpgJ~tyrt~ tpf/~,{etr feet 1n ; &aiistying 8r~rt't~ of tl~{yV'W f ~Fl W~~~~Si4 F IN TERMS OF THE UNILATERAL AGREEMENTS, THE 10%SET-ASIDES THAT YOU MENTIONED ARE CURRENTLY STANDARD FOR DEVELOPERS--WHAT ROLE IS YOUR AGENCY TAKING IN THE NEW 50%'AFFORDABLES' REQUIREMENTS FOR NEW HOUSING PROJECTS? Conant: As you know, unilateral agreement requirements are placed on a developer at the County level, and the County usually has responsibility for overseeing the implementation and satisfaction of those requirements unless it's done at the Land Use Commission level. There have been some cases where the Land Use Commission requires that the developer coordinate with H HA [ Hawai i Housing Authority], or now HFDC. We have not been very much involved in overseeing the implementation of these aspects of the 28 unilateral agreement. From all indications, it appears as though there isn't a lot of effort being made in these areas and that some of the developers, to put it bluntly, are still dragging their feet in satisfying some of these requirements. WHAT ROLE, IF ANY, DO YOU SEE YOUR AGENCY TAKING IN IMPLEMENTING THESE REQUIREMENTS? Conant: We don't see ourselves enforcing that aspect unless the developers seek some assistance from HFDC in carrying out those responsibilities. We are certainly open and are prepared to work with developers who have some of these requirements. THE LAND USE COMMISSION ATTHE STATE LEVELAND THE COUNTIESATTHE REZONING OR DEVELOPMENT PLAN LEVEL, HAVE OFTEN IMPOSED RESIDENTIAL 'SET-ASIDE' REQUIREMENTS ON RESIDENTIAL DEVELOPMENTS. YOU MENTIONED ELSEWHERE THAT THERE ISAN IMPACTONAFFORDABLE HOUSING OF RESORTSANDCOMMERCIALPROJECTS, BUT WHAT DO YOU THINK THE RATIONALE IS FOR IMPOSING SUCH A CONDITION ON RESIDENTIAL PROJECTS? Conant: 1 think for resort developments they see an influx of workers coming into the vicinity of the resort development at least within reasonable commuting distance, and as a result, there is a need to provide shelter for employees. WHATABOUT THE FACT THAT THE LUCAND COUNTIES HAVE NOT TRADITIONALLY IMPOSED HOUSING REQUIREMENTS ON THESE KINDS OF PROJECTS? INSTEAD, IT'S BEEN ON RESIDENTIAL PROJECTS. Conant: I think more so now than in the past because of the numbers and size of these resort developments that are coming on line, some of the Counties are taking a harder look atwhat Impact these resorts are having on their communities, and are beginning to move in a direction to try to get these resort developers to satisfy some of the needs of the community. A good example of that, although Maui County has not formally adopted a policy, is their informal policy that would require a resort developer to produce one dwelling unit for every six rooms built in the resort area. According to officials from Maui County, they have found that the developers have been somewhat receptive to it because they recognize that if they are going to have the kind of employment that they are looking for, theywill have to provide some needs for the employees to reside within a reasonable c stance. '~?g~p6 Ca~t~~~C! t!!t~! tyre prPt~~11~1 St3Cl`f~i!' ~~S gen8rallly bef~n ~#~rr~rppf+ag ht~t~~sFrl~ t`A K~i~t! ex~~nt #rc~i7t:tlttp; ~ `,Z% t'8>'t49 t7!'t t~t~#~~IF31"i# t?~' ttl!i$# tQiN+~1"~:$ ttifit8 ~1~Ae~` #Y~~'H secl~t 1~ goring! t~T tts>x~l t#~itl~li 8 ~ftlt;rs bl~t:!X~ar3r"~ ihan svha€ tf,sy've clun~a In t?tis p8&ti~t iry'Jr?g'to t)'!t3@t fafliw gt'8$IIt93! ,~~[~f5r1~;~ fibl~~5." YOU MENTIONED THAT YOU THINK THAT A REASONABLE AMOUNT OF AFFORDABLE UNITS FOR PRIVATELY-SPONSORED RESIDENTIAL DEVELOPMENTS WOULD BE IN THE 50%RANGE. Conant: You know that developers traditionally have not built housing that's affordable to what we consider to be the gap group and below. Let's say from 120% of median income and below. If housing were to be builtfor that particular income group, the government has been in the forefront providing some meant of developing that kind of housing. We've found that the private sector has generally been 29 developing housing to some extent from the 120%range on up, with more of that towards the higher end of that range--130%, 140%--as opposed tothe lower end of that spectrum. Sowe suddenlyfind ourselves in a tremendous housing crunch because our vacancy rate is less than 2%, which is really no vacancy rate to speak of, at all. It gives people very few choices out there who are looking for units. So, there is this feeling that if we are going to get out of this housing crunch, the private sector is going to have to do a little bit more than what they've done in the past in trying to meet our greatest housing needs. IF DEVELOPERS HAVE BEEN BUILDING TO 130%OR 140%OF MEDIAN INCOME, HOW DOYOU SEE THEM BEING ABLE TO BUILD TO A LOWER SEGMENT? Conant: I think they are going to have to be very innovative. Certainly, they are not going to be operating at the level of profits that they have experienced in building for 140% of the median and above. I think that they are going to be looking at smaller lot sizes if they are talking about single-family units; they are going to be looking at some very innovative multi-family type of complexes, and still will not sacrffice quality just to get the price down. You might be looking at the overall size of the units and looking to see where they can sharpen the pencil so that it is indeed a profitable operation because the market is there. The market is there, and it's Just a matter of building units to try to reach and satisfy that market. I don't think we ought to be competing that much with each other, building for that particular group because the market is there. I think we are going to find each particular income group receiving some form of education as to how best can they prepare to tap that resource because we have known for a number of years that when we deal with families in the lower income range of about 80% and below, just those in the upper spectrum of that group would be eligible to participate in owning asingle-family home unless we have Farmer's Home financing in that particular development. Farmer's Home financing would provide take- outfinancing with interest rates as low as 1 % and we found that some families making 50% of the median income could qualify. YOU MENTIONED THAT THERE IS A PROPOSAL FORA $120 MILLION REVOLVING FUND FOR INFRASTRUCTURE. HOW WOULD THAT WORK? Conant: That fund will be called the Homes Revolving Fund. Once the appropriation is made, those monies will go into the Homes Revolving Fund, then those monies can be used, in this case, for the comprehensive State housing program announced by the Governor, which includes four major planned communities located at Kapolei [Oahu], Kealakehe [Hawaii], Maui and Kauai. The funds are going to be used to take care of the off-site and on-site infrastructure, as well as on-site improvements, so it will be used for financing the construction of dwelling units as well. Once those dwelling units are constructed, we will sell them; then the take-out financing that we get from the sale of these units will be settled through escrow, and escrow will pay back to us those resources we had tied up, which would go right back into the revolving fund. Sowe start outwith $120 million, but over the next ten to twelve yearswe see this fund being leveraged out to at least $1.7 billion and that's with the four major comprehensive planned communities plus the infill projects. We will also be using resources from the Dwelling Unit Revolving Fund. Approximately $30 mil lion from the fund wil I be used to support the four major projects where there are financing shortfalls, as well as for other infill projects. WILL THE DEVELOPERS BORROW THE INFRASTRUCTURE FUNDS FROM THE STATE? Conant: We will provide the infrastructure monies and will take care of putting the infrastructure in. The developers will not borrow these resources. These resources will be available at no carrying cost for the construction of the infrastructure and also the dwelling units. Land cost is not included in the $120 million appropriation that is being requested. Three of these projects are on State-owned land. The only project where we are going to acquire land will be here on Oahu for Kapolei Village. We are acquiring 830 acres there for about $60 million. WHAT PERCENTAGE OF THE SALES PRICE OF THE HOME WILL GO BACK INTO YOUR HOME FUND? AND HOW WILL YOU DETERMINE THE AMOUNT THAT GOES BACK INTO THE FUND? 30 Conant: Actual Iy, 100% of that sales price wil I go back into the Homes Revolving Fund. We will sort it out at the end of the project. Resources that we will gain here in terms of some of the market units will be used to reduce the price of some of the affordable units. The savings thatwe will realize as a result of not having to borrow these monies will likewise be used to cut right off the top of the price of an affordable unit. For example, if we are building an affordable unit for about $90,000, it means thatwe can list that unit then at $80,000 and have that unit available for more qualified families than we would have ff we were pricing it at $90,000. So we are going to pass those savings right on to the affordable housing buyer. x 1NS`Y~ r~t~t~~t~' t~ ~~~~rf~r'13 r~~~ i~~r~ crt;~tfd~r~y ~~~"tl~t~ ;t`~ ~~lat ~Tr~;>~ b~ ~r? #]rre~~r' t~~~~t~tr~ t# t~e~ d~t++r~>?t~or tta w~r~ t~f 1~r>~,?r!t ft~ ~tt`!#~119>^t~l~fjs3 tlt*~'t~e~'ll~`t~. ~rr~t~~s w~l~! rtc?~ ;~r~,~~ 17~~ :t~ tea , d~fri9i~'1y~iltit' llfsk~i' 2~x~~ t~i~ik,5~ ,~tLtt Wtlt ~t#l~' #B~f r~sl~alr~~lblt~' prrr~~ir #t~r u r~'~1relti!p~r.' IN OTHER WORDS, THE DEVELOPER'S ROLE WOULD BEALMOSTASAN EMPLOYEE OFYOURS FOR WHICH HE WILL BE RECEIVING FEES? Conant: Not necessarily an employee of HFDC. He would be working in partnership with HFDC. As you can see, we've reduced the developer's risk here considerably and we think that it is going to be a greater incentive to the developer to want to work in partnership with HFDC. As a result of the reduced risk, the profits would not be as great as M the developer had those risks, but we still see reasonable profits for a developer. THE BILL TO INCREASE THE REAL PROPERTY CONVEYANCE TAX [WHICH WOULD HAVE EARMARKED A PORTION OF THE TAX FOR STATE HOUSING RENTAL ASSISTANCE] HAS RECEIVED A LOT OF COMMENT. WHAT EFFECT DO YOU THINK THIS WOULD HAVE ON THE GENERAL REAL ESTATE MARKET? Conant: I don't real ly know what impact it's going to have on the general real estate market. We see that houses continue to be sold. It would probably take a few years to determine what kind of impact it's going to have, comparing it with the previous few years. We see the conveyance tax as a possible source of revenue on a recurring basis for the rental assistance housing program. As you know, the Federal government has cut back substantially on providing resources for the construction of homes for low- moderate income families and even to a large extent on subsidies, to the point where today there's basically one subsidy program so that exists, the Voucher Program, which is really less than the subsidies provided in the Section 8 existing housing program. So we see a need to establish a rental subsidy program so that the State has a means to fill that gap created by the Federal government. We're talking about families that are at 80%of median income and below. Not just any fan,fly will qualify for subsidies; however, those that are on the lower end of the spectrum we see as having an even greater need for subsidies, but the State rental subsidy program would amount to $175.00 per qualified family per month. We would place the resources thatwe are asking the legislators to appropriate on an annual recurring basis into a revolving fund. We will have short-term investments with the principal amount, and once a rental project is identified, we will convert these short-term investments into long-term investments. These revenues will lie used to subsidize a qualified family's rent. So the principal amount stays intact. WHAT WAS THE BASIS FOR FORMULATING THE CONVEYANCE TAX INCREASE? 31 Conant: To provide [rental assistance] resources to the tune of $10 million/$15 million a year on a recurring basis, that was the objective. 'T1~Er ~QYElf17?Q~' sta~'d St~!'# h~S tTJ tfQ SA~tt'Btl~flt'~ ~bflt!! ~atl~ ~i"~~~~~~ ~/lt?f~~~7if8 At7!~SIn~ ;ffi`/1Qft$>~~. W# lt8!~#3 ~p~ ~Ct d:,t ~Q~t~IG#Pg ~ab~~xt It ~3K+l~ t8f~l h& ~~9~8?t)~f~.fiGtl"~iflt3!'!~/lEl.9t~~,j~'~~.:~41'~tfl4'ti~l!~tft~~'Q t8 ~"i. a SO IT WAS NOT FOR [REAL ESTATE] ANTI-SPE/:ULATION? Conant: No. Definitely not. It is sort of labeled as such, butthat certainlywas not in the thinking thatwent into structuring that formula. THE BILL WOULD APPLY TO ALL REAL ESTATE SALES, NOT JUST HOMES? Conant: Yes, with the exception of transactions less than $150,000. We felt that those homes are in the range of the target groups that we are working with, so it was said that those transactions should be exempt from the increase. BUT IT WOULD APPLY TO ANY COMMERCIAL TRANSACTION, AS WELL, AND WOULD APPLY EVEN IF THE SELLER WERE TAKING A LOSS, AS OPPOSED TO MAKING A PROFIT, FROM THE SALE? Conant: Well yes, it would still apply. There is noway one can tell if he's taking a loss. [Editors' Note: The conveyance tax bill did not pass the 1988 Legislative Session. ] IN THE QUESTION OF WHAT HAPPENS TO THE COST FOR HOUSING EXACTIONS AND IMPACT FEES, YOU COMMENTED THAT EVERYBODY SHOULD PAY. WHO DO YOU THINK CURRENTLY BEARS THE COST OF HOUSING EXACTIONS? Conant: To some extent, some of that is passed on to the consumer. The developers probably assume some of it. So I think it is being spread now, but I don't know exactly how much is being spread, but there is no one particular group that's, say, taking it ail. And the government is also sharing in that. Because when government is the developer we have some of the same requirements that we must satisfy in terms of park dedication requirements and so forth. We have seen Governor Waihee make a really bold commitment and what caused him to make that commitment was the urgent need he sees that exists for affordable housing in our community, and I think he realized that the only way we were going to make any dent in this effort was to make a substantial commitment to the program. When 1 say substantial commitment, I mean the $120 million plus the $t5 million and the other things that we talked about; we are also looking for another $50 million in bond authority for our rental housing program. We have bonding authority for $25 million right now, so we are looking to increase that to a total of $75 million. The tax exempt Mortgage Bond Program is going to sunset at the end of this year. We have an unused authority for about $175 million that we will be trying to issue between now and the end of the year, so as to preserve that $175 million for some of the big projects that we are trying to bring on line. The Governor said the State has to do something about the critical affordable housing shortage. We have got to do something about it now. Enough talk has been 32 putforth on the subject; we now need to act to really produce affordable housing for the people of the State of Hawaii. neaafs >ft? b~' ~t fc~f OI s~rCirk irf lh~t ~r6~1 tft stl'Tt LTf SfreamlJn tfti8 ,sy~et~rrt. Afro /u~t f,i3r i'. ~l7Va8l1"liri8!'l;t, bt~f f+C?l" 8tff ~'Q hati~ S~iFfB Cif th~Se f[Ifti~3 crft{brPlr#iCffp17i3 f Bri'fOfr9E~, A!!'ttf~li'8~Gt0.+19!"~ tryflrf;~ t?Q get SOtrit3 of those'ret~f'rl+etftsns . fernr2v~id." YOU MENTIONED THAT THE STATE IS GOING TO BE ACTIVELY TAKING ON THE ROLE OF THE LAND DEVELOPER. THE CITY HAS ALSO TAKEN ON THE ROLEOFADEVELOPER. DOYOUSEE ANY PROBLEM WITH THE TWO PERMITTING AGENCIES, THE STATE AND COUNTIES, BEING DEVELOPERS, WHILE ALSO CONTROLLING TO SOME EXTENT THROUGH THEIR PERMITTING PROCESS, THE PRODUCTION OF PRIVATE MARKET HOUSING? Conant: I don't really see problems of competing because as I mentioned earlier, I think there is sufficient demand for affordable housing for the people that we are targeting, and everyone who wants to build housing in that income range is going tofind a marketfor the people. There are people there readyto buy. In terms of some of the bureaucratic regulations that one has to comply with and has to go through that process in order to get all the "pukas" on the card punched before you can move out, there still needs to be a lot of work in that area to sort of streamline the system. Not just for government, bui for all to have some of these kinds of restrictions removed, and we too are trying to get some of those restrictions removed. Despite the fact that HFDC is a governmental entity, it is not completely removed from exemptions from all of those processes. DO YOU HAVE TO GO TO THE COUNTIES FOR YOUR PROJECTS, OR CAN THE LUC GIVE YOU EVERYTHING YOU NEED? Conant: We will still have to go to the Counties for subdivision approvals and [State land use] boundary changes if it's over 15 acres, soave still have to go through the process as it is presently established bylaw, and where we deviate from County standards we must then go to the Counties to get those exemptions. As prescribed bylaw, the County would then have a5 days in which to act or to disapprove, and you know the kinds of intensive staff effort that must be put forth in tracking each one of those requests, and HFDC feels that this staff time could be devoted to doing other things. Consequently, the Administration is supporting a bill before the Legislature [SB 3287], seeking to exempt HFDC from that process, but when we get exemptedfrom that process, we must establish standards through the rules process, which means we still have to have public hearings, we still have to go through the OEOC [ Office of Environmental Quality Control requirements. So the public and governmentalagencieswilistiilhaveinputonwhatwearedoing. It's not as if we're going to run wild and do our own thing, because I think there are going to be checks and balances through the public hearing process and through the OEOC process. Thus, you can see that it would certainly streamline the system for us. 33 DUNALd A. GL~G~ This interview with Donald Clegg, Chief Planning Officer for the City & County of Honolulu was conducted on March 2, 1988. WEARELOOKINGTODISCOVER WHATTHECONCERNSAREOFTHEPLANNINGANDHOUSING DIRECTORS AT THE STATE AND COUNTY LEVELS REGARDING THE PROVISION OF INFRASTRUCTURE, AS WELL AS AFFORDABLE HOUSING. AT THE SAME TIME, WE'RE CONDUCTING RESEARCH INTO IMPACT FEES AND HOUSING EXACTIONS FROM THE PLANNING,LEGALANDECONOMICPERSPECTIVES. SO WITHINTHISFRAMEWORK,WHATDO YOU SEE AS THE CURRENTAND LIKELY FUTURE OF INFRASTRUCTURE NEEDS IN TERMS OF PLANNING? Clegg: Well, I think what we're seeing here and what we see in many Mainland cities as they get older is that the infrastructure serving the central or older portion of the city Is deteriorating and needs replacement, and the capital resources of the community have to go there. Newer areas are being developed. In earlier times, the CIP mcnies would be spent on the common infrastructurethat is required but now, monies have to be spent on the replacement infrastructure in the high density population areas, where the infrastructure is 50, 70, 100 years old. Our monies are going there. This means that for the newer areas like Ewa, Central and Mllllani, the developer has to pay the infrastructure fee not only for what's within his subdivision, but the major collectors and connectors, as well. When it comes to water and sewer, that's manageable. It's when you get to freeways and highways that you are suddenly confronted with costs that would destroy any economic attempt at housing subdivision. HOW IS THE COST CURRENTLY BEING ALLOCATED? Clegg: Well, for the water, sewer and other City functions, cost is being allocated to the subdivisions in the newer areas. Developers are being asked to provide front-end money for the major sewer and water trunk lines, and as other developers come on-line, they are charged ahook-up fee which we are gradually amortizing to pay off. As for more stationary features like sewage treatment plants and water reservoirs, the City isfront-ending these items and then charging the cost back. Honouliuii STP is a good example of that. We will add the next increment--13, f 5 million gallons--and then charge that off as users come on- line. SO IN A WAY, YOU'VE ALREADY DEVELOPED AN IMPACT FEE SYSTEM FOR SEWAGE TREATMENT? Clegg: That's true. We already have. Highways provide an interesting item because where you can identify a project that completely and uniquely impacts on a major transportation link, then we can start charging off the interchanges and the access to that development. In the proposals for Mililani Mauka, for example, there are intersections included as part of Development Plan items that would be charged off to develop the units. WHAT ABOUT DEVELOPERS WHO SUBSEQUENTLY COME IN AND USE THAT INTERCHANGE PUT IN BY MILILANI? Clegg: I think they are getting a free ride. You can charge water and sewer off on individual home hook- upsand on usage, but a freeway interchange is open to everybody. It's difficult unless you want tol I roads. TOCHANGE THE SUBJECTA BIT, WHATDOYOU SEE AS THE CURRENTAND FUTURE HOUSING NEEDS OF THE ISLAND? 35 ~ r n r Clegg: The number 40,000 has been bandied a ou d as epresenting the need for housing. Not all of this is necessarily in the gap group or low income, and I'm not sure this number has a great deal of substance behind it, but it does serve as a target. So 25,000 or 30,000--that's still a lot of houses. We know there is enough of a need that is not being met. We're building on the average about 4,000 units a year, mostly by the private sector, including condominiums, which is approximately even with our population growth. But ' there is nothingadditional--wehavesmallerfamilies,fewerpeopleperhousehold,andwehavetheexisting housing that is getting older and just like our infrastructure, needs replacement, so in that sense we are falling behind. IN TERMS OF DIFFERENT CATEGORIES OF NEW DEVELOPMENT, WHAT KINDS OF INFRASTRUCTURE IMPACTS AND AFFORDABLE HOUSING IMPACTS DO YOU SEE WITH RESORT DEVELOPMENTS ON OAHU? Clegg: The new resorts are putting in their own infrastructure. ~jR ~W:,~~~ ~ C,~E?ti`i* ~~sl`lsV#i! !'lt RhB~~ ~~"#B r1~~ts ~f j htr~/ te~Q~'r~Etfll: ~T~ 1'##?t ~l~ly~ fil~#4~ l~±Rt'Xj~~l ~tJ [ !/tt~~ tiD lii~Af fiQ~S+~!x if/l8tt :t3~'~#c~~aer#j~ t"~~~ s tIF!'114~~' ~fitJ~ G`lti8ft~6L>1r ~#t~~ ~j~ ~I?~,}U'~' ?lf~It3 O~ ~t7Y8.i'i!}lf?$tlt ~`A &#il~#d#~i~ j~~8~." OFF-SITE, AS WELL AS ON-SITE? Clegg: They are being charged for their off-sites--Ko'Olina and Turtle Bay [resorts] are basically putting in everything that their impactwould require, except for the highways. For example, Turtle Bay has been chargedwith widening Kamehameha Highway in front of there, putting in turn lanes, slow-down lanes and acceleration lanes. That's fine, but they are not being charged for a portion of the cost of the [proposed] Haleiwa Bypass Road or for widening the road from there to Haleiwa and Waimea Bay, so that again is a State government function. The same is true with Ko'Olina. They are not being charged for any increase that they might cause on the H-1 Freeway and so forth, so where we are having difficulty is in charging off the facilities that are being directly used. As far as housing is concerned, our putting housing requirements onto the developmentandwhether those requirements are realistic in terms of what the development actual ly produces in terms of need for housing, I really don't know. We are just putting something on. I have a similar problem with this, if I can call it, plantation philosophy that it is up to the employer to supply all thehousingfortheworkers. In plantation contextthatwasprettymuchwhatwasdone. Thatwaswhen the workers were of a different era and they were more, say, "captive," in a sense. Their lifestyles were centered almost totally around the plantation. They were physically isolated because of the lack of roads and transportation at that time. Today, I think you have a whole different situation with the resort-type of development to create a worker town or worker neighborhood. It seems a little out of context with our environment and our culture right now, and yet we are laying this requirement on and saying, "Well, okay, if you want to put a hotel up, some statute says that for every so many hotel rooms you have to build a house," and I'm not sure what "build a house" means. I mean, if you're a developer you build a house and give it to the employee, which is not 36 realistic. If you rent it to them at a low cost, that's not realistic. I guess I don't believe in these free rides. If hotel workers are not being paid enough to live, to rent a house, then obviously that has to be changed, but it's not up to our links of the government to subsidize that. WHAT ABOUT THE HOUSING IMPACTS OF, SAY, COMMERCIAL OR INDUSTRIAL DEVELOPMENT? Clegg: Well, the hotel and tourist industry is a commercial development and again, we are not living In an era of paternalism where the big corporation would come in and take over the whole town and own the company store, and everybodywould go into debt to the company. We are just not into that kind of era so I don't think that corporations or businesses have a direct responsibility in this area. I think the responsibility, somehow, is to pay a competitive wage that would allow people to seek what they need on the open market. IN TERMS OF HOUSING, BOTH OUTLYING AREAS AND INCREASED DENSITY IN THE URBAN CENTER, WHAT KINDS OF INFRASTRUCTURE IMPACTS DO YOU SEE THERE AND HOUSING EFFECTS? Clegg: What we see in the urban center is a much more fluid situation and I think again, when a high-rise building goes up, they are really not charged for all of the impacts that they have on the existing infrastructure. Again, there are some hook-up fees, but I don't think these fees are directly related to the usage that they have. EARLIER YOU MENTIONED THE CAPITAL IMPROVEMENT PROGRAM IS NOW GOING TO BUILDING BACKTHE INNER CITY INFRASTRUCTURE, WHICH HASDETERIORATED OVERTIME. iN YOUR PLANS TO BUILD THIS BACK, ARE YOU INCREASING CAPACITY ALSO IN NEW DEVELOPMENTS? Clegg: We are increasing capacity. It turns out we are very fortunate in that when the original engineers and planners builtthe sewer system, they built in monstrous amounts of excess capacity, and we are using sewers in the Makiki area, main sewers that were built fifty years ago and are basically able to handle the capacity, but has Just deteriorated structurally, but we always build and go with excess capacity because the cost to put it in is so small compared to the cost of going back and redoing it. WOULD YOU SEE RECAPTURING ANY OF THAT [COST] FROM NEW, INCREASED- DENSITY DEVELOPMENT? Clegg: Yes. I think there has to be a more reasoned, more equitable and more formal way of capturing from new development their share of the increased load they place upon the government infrastructure. That's where we come into the impact fee area. I think that ft's a fairer proposition to have impact fees and to have the new development pay their own way, and that's kind of tough on the new developments that are coming in nowwhen the older developments didn't have to pay their own way, but I don't think we have an alternative anymore. The new developments have to pay their own way and now the question is how do you make that fair, and this is where a more formalized impact fee structure does this. There is this horrible term being used: "extraction." I always think of teeth coming out. You go in and take some of the developer's molars away as we extract the infrastructure cost and extract our school and police station and so on. AND I BET THEY FEEL LIKE THAT SOMETIMES. Clegg: I'm sure it feels that way to the developer. 37 it/?il~k rft IS sctct~l;fy, very JrrlF~f~~~ ~+ikt>~t! &~$~f~'l~ltlpr meyj get i~~t~1~ ~iC, gt~t f ~h~?a!~etf tt~ ~ abf~h~r 8~#7[ I~~3~ ~I~~I ~t fit 8 hl;g~~r~rtE~~rtr~El~~ui~!~`r~~~tfa~;~~~~~r~i~t~r~~ #i~ #~~lld.' SINCE THERE IS AN EXTRACTION OR EXACTION OF HOUSING SOMETIMES AT THE STATE LEVEL AND SOMETIMES AT THE COUNTY LEVEL FOR NEW RESIDENTIAL DEVELOPMENT, WHAT CONNECTION DOYOU SEE BETWEEN BUILDING A NEW HOUSING DEVELOPMENTAND CAUSING A NEED FOR AFFORDABLE HOUSING? Clegg: That's a pretty tortured relationship under the concept of "rational nexus." I love those words. Lawyers treasure those things, but I think it's pretty hard to show that a subdivision being developed creates a need for low-income housing, unless we are in Beverly Hills and we all have maids and some of the maids don't get paid enough to buy amoderate-income house. So I don't think the housing development per se could do that. I think there is an extraction that needs to be considered and is something that we have not done, and I think needs to be done. That is, when we do something like change the zoning of land to allow a higher, more intensive use, what happens is because of an act of government, the landowner or developer is now able now to go in and get more money from the land whether he just sells it to someone the way it is or whether he develops it to that higher use, and basically this costs the owner very little. The owner or developer has holding costs, cost of processing, and other costs which are not really large when one considers the total increase of value that is given when one goes from Agriculture to Apartment or to Residential or Commercial [designation], and I think the government needs to participate in that increase in value, and this is again where there is not necessarily an impact fee in the direct sense, but rather a participation in value added. K ...~~en wle p~~t~ ~ r~;~iF~ .tr~n~~t 5~S`r~31i1: 4lftfl~fQltBrl' iwe plflt.;~~stl~it#c7Tti,. w~ ~rr~r~~se ra~~ ~ralr~re a~ prr~j~~rcy era~tr~~. ~ ~t~ink the ~nvl~rttrr~et~t rf~#tt to p~rtlcfp~te in ~`~~t Pncre~~~d v~:~trlEa..:., IS THIS THE RATIONALE BEHIND THE ADMINISTRATION'S DRAFT COMMUNITY BENEFIT ORDINANCE? Clegg: I think that's one element of the Community Benefit Assessment ordinance. I think it also has an extraction as an impact fee scale. I can't recall all the details, but I know it does have this value-added concept. What is a prime concern to us is the use of land as a commoditywithout any value added. I think this is socially, very irritating when a speculator may get land, hold it, get it changed to a higher use and then sell it at a higher price without ever adding any value to the land. Then typicallywhen the land finally gets developed for the use that is permitted, and it is turned over two or three times and again you have 38 an increase in value without any value added by the people who are doing it, I think it is in that area of speculation that we need some government controls and regulations. For the government to participate in the increased value because of a government act then, I think, is justified and to participate heavily, first of all, to get increased funds and, second of all, to discourage that kind of speculation. We may want to participate in the value added up to fifty percent, which is pretty heavy. Thosefunds, of course, may be used for infrastructure or things the government does not now have the funds to do. But I feel strongly about this--it's like when we plan a rapid transit system: wherever we put a station, which means we utilize government money, we increase the value of the property around. I think the government has a right to participate in that increased value in some sense almost as an equity partner because they have spent government funds to create a function such as a transit stop, and the property owner there gets an Increased value without spending anything--we need to participate in that. WHAT DO YOU THINK HAPPENS TO THESE COSTS, WHETHER AN IMPACT FEE COST OR VALUE-ADDED COST OR HOUSING EXTRACTION COST? WHO DOYOU THINK ACTUALLY PAYS FOR THAT? Clegg: Well, I guess in the long run, it's the eventual user who pays for it. So in the long run, the guy who finally has the mortgage on the house is going to pay for alt of the things that have been extracted along the line. For the transit stop situation, it's whoever eventually goes into business and pays rent and mortgages on that property who is going to pay it. And, of course, in that case the business will charge itofftothepersonwho'sbuying. Butthosepeopleareinacompetitivesituationwithotherbusinesseswho are not around a transit stop, and it may be that because of the transit stop, a service now becomes competitive. For example, you could probably get a higher rent for an apartment that is next to a transit than you could from an apartment several miles away just because of providing that pazticular service. [~~_,ylr]lS!-uItitttx~~eilt f~ ®~t~#tol~.' >~fl ~ansumer~`>q~~r~~~tt~~jrit~~~;~~~~~',it~~h~ ~s tai~t~r~+r ter a~~re,~ ~~nf~r ~ ll>3us~ irn tfahe~~ ,vrr lt~~lltl#1 ar ~l'I~tt~~ pa.:.y ~ jrt~srf i1t1~. ilr~st ~a~l>tr#~ ~ :d 8#'s wt3~if ;th ~f `~~t7#i?~ ~~~#I! ~i i~~':~1~~~ t;t ~Ir'at of tea in~rt~srri>r~~~re ~~~i~ t~t:~~~~' pl°iCi~fiaS Wht~ ~3i+tjr ~`i6 ~C!>IIIIS t~~~~ ~ p~~~~a;~ for.F WHAT ABOUT HOUSING DEVELOPMENT IN THE EWA OR CENTRAL AREA WHERE AN IMPACT FEE OR A VALUE-ADDED FEE WOULD ACCOMPANY IT? WOULD THE END CONSUMER PAY THAT COST OR WOULD THE LANDOWNER PAY THAT COST? Clegg: Well, the consumer is going to pay it at the end, and the issue that we have to decide upon as the City is whether the property owner who lives in ~ condominium in Central Oahu, or lives in a house in Kahala or Makiki or Manoa is going to pay a part df the cost of having a house in Ewa. That's the case if we subsidize and payfor Infrastructure under the general fund and that's whatthey are doing. On the other 39 hand, if al I of the infrastructure cost is charged off to the particular development, then the people who buy the homes there end up paying for it. There is also an issue that comes back that says "Well, whenever we add value, we also add more taxes." Well, I certainly think that is a part of it but I think that associated with continuing to have value for a particular property, you pay taxes for that purpose versus the creation of that value through zonings and increased infrastructure cost. DO YOU THINK THATAN IMPACT FEE SYSTEM, IF ONE WERE IMPLEMENTED, SHOULD APPLY TO ALL DEVELOPMENTS REGARDLESS OF SIZE OR TYPES, OR JUST THE LARGE ONES OR JUST ONES IN CERTAIN AREAS? Clegg: Well, to be ultimately fair it should apply to all development no matter what size, and I think what we have done is pretty much done. Say our park dedication fees, I think that we exempt projects somewhere around less than four or five units, or so. Anything above that is charged a fee for park dedication. When it comes to a larger subdivision, they donate land for a park in some formula, which is negotiated at the time. Whereas, in the cenVal city we can't. We buy land for a park, they donate money and collectively, a number of projects will pay for a park somewhere. PRESUMABLY WITH TRANSPORTATION, IT MAY WORK A LITTLE DIFFERENTLY. EARLIER WE TALKED ABOUT THE FACT THAT TRANSPORTATION MAY JUST BE TARGETED TO ONE THING RIGHT NOW. AN INTERCHANGE, FOR INSTANCE. Clegg: Yes, it's hard to extract a direct fee for that. You could create a formula that says for every house you generate 1.5 cars, and that means we will charge you a tax on the cars to build an interchange. However, we get into a lot of overlapping jurisdiction that would create some problems for the State and County. ACTUALLY, THAT WAS ONE OF MY QUESTIONS. GIVEN THAT THE STATE AND COUNTIES ARE INVOLVED IN INFRASTRUCTURE,AS WELLASAFFORDABLE HOUSING NOW MOREAND MORE, WHAT CONFLICTS OR POSSIBILITIES OF DUPLICATION DO YOU SEE BETWEEN THESE TWO ROLES? Clegg: Well, there needn't be anyconflict, but there is a great deal of conflictatthe present. The Counties have the expertise in land use management of a general class and they have expertise in infrastructure, and I see a lot of movement on the part of the State Legislature to transfer many of these functions to State agencies that don't have the expertise. We are faced with a situation like in Kaka'ako where the State has a Development Authority and says well, all of the zoning laws and land use controls that were in the County's hands shall now be under the jurisdiction of the Authority. The unfortunate part orunfafrpartwlthregardtoinfrastructureisthattheState goes in and builds it, but it has to connect up to the City's portion. You can't have a sewer line that just ends at Kapiolani Boulevard, and the City does not have the option of saying "I will not hook our sewer treatment plant to your sewer line." Yet we have no say-so on whether that sewer line is built, how large it will be, or how many people will be hooked up to it. But somehow we are expected to supply the other remaining portion of that infrastructure, whether it be sewer, water or roads, and 1 think this is not only unfair, it's got to be "the pits" of planning. The other unfortunate and unfair thing is that the State now says "Oh, by the way, this is now yours. This is your water system, this is your sewer system, your road system thatwe have just developed and you will have the chance of maintaining it,"and hopefully, it is generally built to County standards, but it need not be. So we don't have any of the controls over what is built or how it's built, yet we are given the responsibility of maintaining it and transporting what it produces through our infrastructure system for which we receive no assistance, and the frequency of this kind of process seems to be accelerating. This was once proposed for the Ewa area to have another Authority to take over and develop the Ewa town and the Ewa housing. However, all of that developmentwould have used the Honouliuli sewage treatment 40 plant, which somehow the City is supposed to cover. I see this mentality also occurring on the Kohala Coast on the Big Island. The same kind of thing. So yes, there are a great deal of conflicts In this area that are getting worse. FROM AN INDIVIDUAL DEVELOPER'S POINT OF VIEW, WOULD IT NOT BE BETTER TO DEAL WITH, SAY, ONE JOINT AUTHORITY RATHER THAN TWO DISCRETE ENTITIES, IN TERMS OF PERMITTING AND IMPACT FEES? Clegg: Weil, there is one authority that the Counties are allowed and the Counties do best. The only area where it is different for some other agency is when we come to major highways. And I think that is something the Authority concept will not solve because at that pointwe start to get the Federal government into the act because they supply 80% or 90% of the money for the highways that the State is financially and structurally involved in, and to the extent that the developer needs that kind of thing, they have to start dealingwiththeStateDOT[DepartmentofTransportation]. The Authority mustdothesamethingt>ecause you [still have to] summon up the Federal government into the act, and now there are three layers of government involved. Smote ltousihtstfi~s `.~J3 ~ 7,~ ~ ?7t9t'3f' ~alvat~er. Itj±jfJt3 Of a~ttJrttd~ art ~h~l~~'It ~~t8[tA' whitrh! ~~r>`I!~~ ~tft ~c;~ .says ~~t~, f~+~i~r don't wig dust t$Ika ~t~ atr~ ~~~e ~~xt~ ~ ' gap rau~l a~tl wa~yd~n~t wa t;t`t>xt t~lt:~'>A"'~ of t~a~ I~ti96.s~ia~~ 1!~i~ trod ~©'9bt~ ~,y#~R6 0~ r~?e~fan Jncor~l~~^° ":~~are qfe~ t~?ase r~ttbars of~~me'#rt~;!n ~ i~~ y1~u Jc~tti!trv wls~lt~#~fr ~ ~7t'~'~~ ~'ri th~tf 8~~+'R ~~f7 X38 a~Ggl7rOi7sf~~~#~t tr;~a~tl~]i1f'~t~f1 #ftO~re kti~++d& ~a€ r"+~~;'1~~#tt inn ICS'" THE STATE HAS BECOME MORE INVOLVED IN AFFORDABLE HOUSING EXACTIONS AT THE LAND USE CONVERSION STAGE. DOYOUSEETHATASPRESENTINGAPOTENTIALCONFLICT OF DUPLICATION? Clegg: Very much so because there is just so much that can be extracted and still have a project that is viable. If the State is to extract all of the potential, then there is really nothing left for those functions that are still mandated by the Legislature that the Counties perform, and primarily these fall under police functions and health and safety functions, and still requires us to have police departments and fire departments and water and sewer connections. Yet, the monies in a project are taken by the State, and' , there is really not much left for the Counties. So I find it a very cavalier type of attitude on the part of the State which comes out and says "Well, why don't we just take Z60% and make that into a gap group and why don't we create that 30% of the 60% shall be from 80% to 120°h of median income?" Where do these numbers come from? Do you know whether a project in that area can be economically viable with those kinds of restrictions on it? Nobody has given thought to that. The attitude seems to be "Well, let's just take it because we all know that they make lots of money anyway and we're Just participating in that. Sowe're just really takingwhat's ours anyway." And I think that's kind of cavalier and superficial,andthat'stypicalofwhatlseeastheStateplanningandtheStateoperationalfunction. There's not much depth in that kind of planning. 41 GIVEN THAT YOU HAVE FAIRLY WELL SUMMARIZED THE POTENTIAL CONFLICTS AND DUPLICATIONS, DO YOU SEE ANY OPPORTUNITIES FOR COOPERATION OR STREAMLINING IN THE AREA OF IMPACT FEES OR AFFORDABLE HOUSING PROVISIONS BETWEENTHE STATE AND COUNTIES? Clegg: I really don't think the State should be in the impactfee business. I don't think the State Land Use Commission should be in the housing extraction business. The State Land Use Commission, which is the State land classification process, should be determining whether land should be urban or ag, and once they have made that decision, they should then get out of the act. You know, we talk about all the urban functions being housing--there are a lot of other urban uses, like industrial and commercial uses. Butthey seem to be dropped by the wayside, and the whole emphasis and direction and spotlight is on housing, like all we're doing is converting land to housing, so I see that the legislation nibbles away and keeps adding to the State Land Use Commission's functions, and that's why you have an appointed body who is not responsible to the elector, only responsible to the Governor, making these major land use decisions and taking away the prerogatives and flexibility of the elected officials at the County level for doing those things. Whatthis does is distance the governmentfrom the elector, and the elector--1 don't think they havewoken up to that yet. One of these days they're going to wake up and find out that they realty have a big brother up there and they didn't elect him. With the Council members, they're on the hot seat every day of the week, every day of the year. Whereas your elected officials of the State [Legisisture] go home after sixty days and then leave everything to a lot of appointed officials, appointed by the Governor, and many of them, like the commissions, once appointed, the Governor has great difficulty in replacing them. That's the danger that I see. 'tt;fs Stlil~ to m~f Gtauntl~s'resj~rirast#aptfry #~a:t~r~t~rrxaina3 the ~~ttern tai lend ~8~ ..And #l~~t~hi~(~1ta?,~~tl~~t,~tt~tr~gf~~3tt~. ~'hatts~tat~f~t tae tlae 1~~+ting+C1 etsrmlra~r tai w#,~r~e t/a~e St#a!~ we~ut~t! ~'j:3earati /t3Pl?ft'Atas`!/'kt~itlal'e: tltatt~rs.' IN TERMS OF THE PROVISION OF INFRASTRUCTURE AND AFFORDABLE HOUSING, WHAT DO YOU SEE AS THE APPROPRIATE ROLES FOR THE STATE, THE COUNTY AND THE PRIVATE SECTOR? Clegg: The State has constitutionally [the responsibility for] infrastructure, that's really public facilities. They have education and schools. The State and Federal government, the major arteries of highway and freeways. It is still, to me, the Counties' responsibility to determine the pattern of land use within the Counties and what development shall go where. And that should be the leading issue. That should be the leading determiner of where the State would spend its infrastructure dollars. This does not mean the State must spend, but the State must have the horse before the cart, not the cart before the horse to put in a highway and totally plan as to location by the Highway Department, which bears no relationship to the other elements of land use because highways greatly influence land use. The restof the infrastructure, supplied by government, are basically Countyfunctions, notto mention the police and fire services, and for an appointed body to come in and basically force the requirement for the Counties to supply these services without the Counties having asay-so or a deciding role is totally a misuse of the government functions and misuse of response of government. 42 WHAT ABOUT PRIVATE INDUSTRY--WHAT'S THEIR ROLE IN THE PROCESS? Clegg: Well, there's, shall we say, a formal role and a real role. In reality, I think the real role of the private sector is basically the element that makes things happen. They're the element that gets things done. I don't believe the government has the capacityto get things done nor should the government be concerned about the actual doing of things, and that's what the private sector does best. I think the government's role is one of direction and protection within the broader limits, and one of control. There is an element of control permitting this. There is an element here that I would like to address and that is the concept and relationship between impact fees and development agreements, and we have had a lot of comment and discussion about development agreements. There is a [development agreements] bill that has been languishing in the City Council for a year, I think. It is a successful form of relationship between the private sector and the public sector, and is something that needs to get out and get into our bag of tools. I think the ultimately fair way of extraction of impact fees and defining the role of government and the private sector in development is if there is an ordinance or a set of rules for a menu of impact fees. I think what the development agreements do is that they will promise the developer that the fee structure that they see as they go into development will stay the same or will change in a known manner which is a part of that agreement for some later time, so that the developer is able to reduce uncertainty or plan for the future. f~{i}~n,yy~ktae2fta~nya Q{'"~'Y}~I~r't7~~y~YQlw~'#~6;~~~&y,~{~y~#p.tl~t7~ IS 1?rftJ~ ass f:t~er~'~'~~ bar t~~t~,~r'~t~~~ti ~t~r~~~~x ata+d GIs" ta~~ t~x#~r r~1~ ~~~Isr`at ~nf~ ~rh~€t's ~~af ~a ~~p,~f~~ ~t~l~;~ 1'~~ IS THE DEVELOPMENT AGREEMENT SOMETHING THAT THE DEVELOPER AND THE COUNTY MUTUALLY AGREE TO, AND CAN EITHER ONE REQUEST IT? Clegg: Wel I, they both must agree to it and the County may request it and the developer may not, and the County may then say "Well then, we will just go and tend to somebody else." The Counties really have the drop if the developer wants to go ahead and grumble. If the developer wants one, the County really again has the drop by saying "Well, we don't want to enter into one and if you want to go and develop, then you have to abide by a bunch of rules that are not covered by an agreement," and the case has generally been that both parties have been pleased with the agreement because it does provide the structuring of predictability, and both parties agree to it. That's the important part. We don't have that now. Every developer goes in and is held up at every drawbridge by whatever escrow or whatever happens to be controlling--troll, 1 think that's the word-- whatever trot lhas control over that particular barrier, and as the developer begins his journey to eventually reach the castle and get it built, he doesn't know what's going to happen along the way. I think we have very much of a troll system of uncertainty that developers have to go through to win the ways of the government, and I don't think that's fair, so therefore, the development agreement. 43 .Y#fr` S~~r ~1`tP. itr#;IfTa~t f8:~. ~'I!&` cQmtrrcr~rlt;;r ~Ett~>>3lf! Qt`~lt~a~>w~k ,aa~'# p!' ' #~,@+~~ afB ff;,l3at;/t'~t8 i'~~ Z'#l~ft#~j O~i~ilf81?&'~3r 'i Tlaay af8 a &6t i~f f'~,/~$"~'r jSl1d rrvl~l! tr~#;t t#~ala~manta,~rea~~l;rai+~tx~es~spr~3r?'rlsatltt th.pserul~swQn't~hata~ectaara'©maparfv~Etf ti~ta: IS IT A TROLL SYSTEM OR TOLL SYSTEM? Clegg: I think the function of the troll is to extract a toll and that's what impact fees bring. WHAT DO YOU THINK OF YOUR DRAFT DEVELOPMENT AGREEMENTS ORDINANCE? THAT'S SOMETHING THAT YOUR AGENCY PROPOSED, RIGHT? Clegg: I think it will be passed because it is a good thing, and I hope that it will pass in a form similar to whatwe proposed, in the sense that what is proposed allows a great deal of flexibility in the drawing of the agreements, and l think this is necessary. If your development agreements are so structured by ordinance that you don't have the flexibility to meet individual projects then you have certainly lost a great deal of the value of the agreement, but I think if the developer goes in with his eyes open and if he makes a bad agreement, that's tough. I think certainly if a government makes a bad agreement that's kind of tough too. It rules both parties to be very "akamai" in what they do in making these agreements. You see, the impact fee, the community benefit ordinance--all of these are just like the zoning ordinance. They are a set of rules, and what the development agreement does is promise that those rules won't change over some period of time. The development agreement does not change the rules. SO THEY'RE IMMUNE FROM FURTHER LEGISLATIVE OR REFERENDUM ACTION? ONCE THE DEVELOPMENT AGREEMENT IS SIGNED, THE COUNCIL COULD NOT THEN CHANGE IT ARBITRARILY, NOR THE ELECTOR? Clegg: The Council cannot change it, period. Either arbitrarily orwith reason, for the period of time of the contract that is proposed, unless the contract provides for certain loopholes, and most of them do in terms of health and safety--in that case, the rules may be changed. But again, the parties go into that agreement k Wowing what the loop-holes and restrictions are, and that's the important part. It's important to recognize that the development agreement does not preempt a discretionary act by the Council at a future time, and by that is meant that the development agreement cannot force the Council to agree to a zone change in the future. That comes under the heading of contract zoning, and that is not one of the things that development agreements can door are supposed to do, because it has not commited future Council to act in a certain way. In some sense, it prohibits a future Council from acting in a certain way because it prohibits the future Council from changing the laws. The Council may change the laws in the future but it may not apply those laws to the particular project covered by the development agreement as long as the development agreement is in place. NOW THAT THE CITY HAS PERMISSION TO GO AHEAD WITH ITS WEST LOCH PROJECT AND THE STATE HAS ITS KAPOLEI PROJECT, DO YOU SEE ANY PROBLEMS WHEN GOVERNMENT, WHICH HAS THE ZONING POWER EITHER AT THE STATE OR COUNTY LEVEL, TAKES ON THE ROLE OF A DEVELOPER? ANY CONFLICT WITH THAT, GIVEN THE FACT THAT COMPETITORS, OTHER DEVELOPERS IN THE PRIVATE SECTOR, ARE TRYING TO DEVELOP IN THE SAMEAREA AND HAVE TO COME TO THESE GOVERNMENT AGENCIES FOR ZONING CONTROLS? Clegg: I do, and I have expressed a great deal of concern that government can pertorm and address. I 44 think if I were to see drawbacks, I would say that the government needs to work with the private sector and let the private sector do the doing, and the value and the contribution of government is that we can get money at lower prices because we're government. We have a lot of bargaining chips for land and the cost of land because we do have control over what it is used for, and we have condemnation powers--these are the two things that government brings to the table. I guess that the other thing government could bring to the table is a concentration of relative activity in a particular area. We have discretion as to where our Board of Water Supply engineers are working and where our public works guys are working. We have discretion and allocation of the time, and if we are dealing with a particular pro)ectwe can allocate a larger portion of time to get something that government has to do done. So these are the things that government brings to the table. And I think having brought that to the table, the government needs to work with the private sector to let the private sector accomplish that even if it's only on a contractual basis with the department. DO YOU MEAN A JOINT DEVELOPMENT OR JOINT VENTURE? Clegg: I don't see in housing that it's really a joint venture because we are not getting in the business of making any money on this housing. It is joint in the sense of having bonds for construction monies and letting the developer use these monies under a contract to us to go ahead under our conceptual plans. The developer wil I take a percentage of the profit, and then once that money is sold to the final house buyer we then take that money and go do another project. That's sort of the waywe are doing it now, except that I think we are inclined to be more of a developer in terms of hiring "subs" rather than a general contractor, so we need to hire a general developer I think to come in and to develop the thing with us, bringing to the developer these things that help reduce the cost, and yet another thing we can bring to the table is the regulatory element. We are able through the [Chapter] 359G [now, Chapter 207 E, HRSj process to come in and say "We don't really need to abide by those stringent rules we set up for everybody else." That sounds terribly unfair and possibly it is, but we are able to do that under 359G and the developers working with us can participate in that, but the constraints on the other side is that the developer cannot get into charging whatever is fair, so it is not a truly fair-enterprise situation. They have to charge and sell to a particular restricted set of people under a set of prices as obtained in that manner. So let's see how that works. IS THAT THE PLAN FOR THE WEST LOCH DEVELOPMENT? Clegg: In the West Loch developmentwe are acting more like the general contractor ourselves and hiring "subs" rather than hiring a general contractor. When it comes to building the house itseH, we will pretty much get out of the business, but in the land infrasVUCture end and the developmentfor on-sites and land and getting the lots ready, we're pretty much acting like a general contractor. One area that is not a government role, as I see it, is in financing take-out loans, and to the extent that we try to get into that business, we're just going to overload our borrowing capacity beyond what need be to the detriment of other things that we need to borrow for. So we cannot just get into business with the private sector. The other area that we looked at, as far as the State and County roles, is that the State is charged with the provision of social services to the community. It is not a County role and we don't get the taxes to support the social needs of the community. And one of the social needs is that these people, for one reason or another, are unable to help themselves. Are unable to obtain any housing in the private market, soave start getting into rental projects and I think it becomes part of the social needs of the community as a necessity, such as food and medical care and welfare. That's the extent to which the State gets directly involved in housing, and that's the role that they pretty much I~~ave taken in the various rental projects that the State has participated in. Kuhio Park Terrace, Mayor Wright Housing are projects that we know about, and while we may throw stones at them in terms of what we think is a successful housing project, they are obviously 45 to some degree successful, and are fulfilling a need because they exist and people are living in them. If they weren't there, we don't know where they would be. In terms of the new housing areas we go into, at one time we were working with the State Hawaii Housing AuthorityonKapoleiVillage. WehadprettymuchdividedourrulessothattheStatewouldbeinvolvedwith the development of multi-family housing rental projects and we would be involved with the gap-group and single-family and townhouse-type of projects where we're not involved in the equity ownership of the project. If you're a rental agency, you're involved in the ownership of it, whereas we're involved in the processing and turning over of money so that new houses can be built and then turned over to owners. So I think as far as dividing up the roles in housing, that is a place where the State would be. Now, admittedly, that's the worst role, but in looking back at it, in some sense, that's what the State is paid to do because they are paid to take on that social welfare function with whatever assistance they get from the Federal government. The Counties are not, and the Counties' role is basically a provision of the general services, police and fire functions. So to the extent that the State does not want to do the things that they are "paid" to do, then we have a problem. 46 JOIiHE P. WHtALEN This interview with City & County of Honolulu Director of Land UtillzationJohn P. Whalen was conducted on March 2, 1988. Whalen: To give a little background on the Community Benefit Assessment bill, the origin of that was to rationalize, in al I meanings of the word, the exaction process that goes on at the zone change stage. It had that specific purpose: to make the process for unilateral agreements more orderly, predictable and fair. Fair in the sense that itwould be based on some formula relating to the type and scale of the project. It was conceived at a time [ 1986] when there really had not been very much in the way of litigation or refinement of the system called "impact fees." And the position taken was to not radically change our existing way of doing things, but to give it a bit more semblance of order. The other objective we had in mind was to be all-inclusive: to look at new developments in a comprehensive way, not just infrastructure needs, but also some of the socio-economic impacts of development. So it didn't really segment or compartmentalize different aspects of the development. r 81'1 Ii77j!J$ty"~ ~f!$ +~~~rt7~tQ~l 11'tiS~f' ~1#~ ,3~ij;3ryyL~~7j?rl~I~l3r: ittt $O,i<!7~ ~jf!~i~$ t7# ;t/I~xf~+Sr:i ~DEa< ; $~J~QI*1l~Pf~j T~tf#~t~#~~ ~~~~te~~t ~"~A~r~ ~r~ 1~IE t~f tiF#f~l#'+~~rl` ~t~~ ;n# ~~~~l~r~~! for ~Ift~3rd~~#~!#t~tts~l~~tq~~t~l~~t~~t~e€3~'p~#'-~~t# rfsile I~I~tfi"~#~I*;~I~ffi, ~,l~i'~ ~~tltll#~~.`,}lYl~ IP~#R~l~lY" The workshop we had on the Community Benefit Assessment raised some questions about the legality of doing things in this way. There's been some recent case law in Florida. I can understand what the legal issues are. I still have concerns, from the administrative perspective, about having compartmentalized funds for the different types of infrastructure and/or housing or child care or other social services that may be part of an exactlon process. I also think it discourages comprehensive planning if you compartmentalize, so I do have some reservations about it. But really, the litigation is starting to shape my thinking about how an impact fee system would work. Maybe not at the time of zone change, but at other levels, also. From my personal perspective, an impact fee approach may be appropriate for some types of things, and maybe not others. It shouldn't be seen as something in isolation because there are a lot of different ways of providing for affordable housing or child care or park-and-ride facilities, and financing them. So I think we need to take a look at the whole picture and see what fits and doesn't before jumping into an impact fee system for virtually all conceivable government functions or social needs. I THINK THAT NATIONALLYTHERE'S BEEN ATREND TO BE VERY SPECIFIC AS TOA FUNCTION AND ESTABLISH A FEE FOR THAT FUNCTION, RATHER THAN CREATE ONE ALL- ENCOMPASSING SYSTEM. 47 Whalen: There've been different variations of that, of course. Big Island has a proposed new ordinance. You always have everything in one trunk in a sense. So I think there are a number of ways you could manage that. The assessment and collection process becomes difficult, the more funds you have. Also, the appropriation process becomes quite cumbersome to release funds for certain kinds of things. It seems to me that the benefits of exacting money may be outweighed in some uses by the difficulty in actually getting it released and used for something. SOME OF THE MECHANICS? Whalen: Yes, the mechanics, because government does things in different ways from the private sector. The more that we can emphasize "in lieu" approaches--dedication of land or actual construction of facilities, if that's what it takes--instead of paying money to the government, I think it's probably all the better. It would help expedite the completion of the project in many ways. I don't really think the government wants to be in the business of collecting money for the sake of it. It has to be for a purpose, and if the purpose is better served by actually getting the Infrastructure constructed--or whatever those needs are--by the private sector, all the better. WHAT DO YOU SEE AS THE CURRENT MAJOR INFRASTRUCTURE NEEDS OF OAHU? Whalen: Well, the basic ones of water supplies, sewer, and of course, transportation. But, you know, it goes beyond roads. I think the transportation needs are of critical importance, whether it's the roadway network or things which relieve traffic on the roads, including rapid transit and the bus system. For water supply, we already have an impact fee system. We have a bill at the City Council for a sewer impact fee very similar to the water supply impact fee that the Board of Water Supply has. That was based on the Brown and Caldwell study. That had been held back, I think, for a little bit until we were clearer on the direction of community benefit assessment. Since the CBA was not taking hold, shall we say, the sewer impact fee bill was sent to Council. So I think these are the three basic elements, at least as far as government is concerned. Obviously, there are other utilities. Schools are also important, depending on the scope and scale of the project or the type and scale of the project. If it's a residential project designed to serve families with children, school needs are a big concern, not for the Counties but for the State. That's not quite Infrastructure. Then you get into otherthingssimilartoschools. For example, policeandfireprotection,whichrequirefacilities,butarenot strictly infrastructure. ` ~{yyppj ppy ~y?~ Sf1~~f'f~ li f'+~ Ys+M'~~ ~~ir'~' ~~sr,!j~Ii~at~tl tip d+~a~ t~~~~ t~le~Tn~'r>~~l~~rirrf~ttx no~al~k~l. ft's 1a~s trr~t~ral~lFs, ~s r;~s~tt~ ; 88t3`idi";~lJi" Ifs ~ .1~'S ~q1 ~b~~~~r~w~~ tX+~t en~gi~~r ~~tn r~+~e 2ta~l t~rr~l~#~.".. WHAT ABOUT HOUSING? Whalen: Well, I'm really not sure whether housing can be considered an infrastructure. I feel it's more within the social impact aspects of new development as opposed to the hardware impacts. It's really very complicated. I think it's much more complicated to deal with than the infrastructure needs. It's less measurable, less readily measurable. It is more influenced by external factors, such as interest rates and demographics--all kinds of things. It's not something that an engineer can reduce to a formula. Schools obviously have something to do with demographics, too. But you can more readily predict school enrollment than you can the need for assisted housing. For one thing, the "gap group" always changes. 48 CURRENTLY WHO IS THE PROVIDER OF MOST OFF-SITE INFRASTRUCTURE? Whalen: Most off-site infrastructure is provided by the private sector. For example, water supply is, because it depends almost exclusively on user fees of some sort. Sewer infrastructure is paid for in large part, I would say, by the private sector because installation of sewer lines to serve new development is always required. But government pays for major interceptor lines or sometimes the upgrading of sewer lines in already urbanized areas to serve redevelopment. New or expanded sewage treatment plants are handled in a variety of ways, largely by a combination of Federal grants and City and State money, but there have been cases where the private sector has provided the money for expansion of a plant. That's a little bit harder to generalize, because it depends. If the private sector is interested enough to proceed in advance of some Federal grant or the availability of State or City funds for sewer Infrastructure, they wil I put up the money themselves. It's more important for them to proceed quickly, it seems. #h~~, #/1 ~~H ~I~~r~l~!#7[9f~13 ~la;stf7$,'jCF~at'~+~~~~'`: ~et~~ra1 ~s~~,~i~ar~:~a rs d~~~~r~ t-~~~ yy~#n'th~S~~yyt?``s ;l`~~ ~kq~3~er~y s~ytrpYl~#ryl~l~~~^~y~~t~~'y~~~ !Ql ~'~:L~TAi ~~s~~fly~~}~~i iii Mpy~~~,j~~A'"If~ .K}t'~Jy~~ ~~~~~~j~t~~~F~,';(~~i~'{ ~$f~~~`~#1~i!"ll,~ # ~~~~~i ~s~~i~F As for transportation, again, a lot of times new development has provided for transportation improvements, such as road widening, particularly if it's a direct access road. It's a little less clear when it involves a Federally-aided project. There have been a couple of cases where developers have agreed to pay the State's share of a new interchange, for example. I don't know where that has actually occurred yet, but they have agreed to pay that local share of the cost. The real problem is that, in the sewer and the transportation area, Federal assistance is declining. We just don't have the money available that we used to, so that funding for the projects that we would like--or need, actually--for new developments just isn't there, at least on the timetable that we need it. If we want to wait for it to happen, it's going to be a long period, and meanwhile, we're not going to be able to provide for our growth needs. WHAT ABOUT AFFORDABLE HOUSING? Whalen: Again, the terms almost have to be defined. If you define affordable housing as housing which is not being supplied by the marketplace, then it's the government that is really providing it. It's often provided in conjunction with a private developer, but with some form of government assistance. It can range all the way from very soft forms of assistance, such as Hula Mae financing or FHA, or more indirect means of providing housing assistance, to direct appropriations for construction or purchasing land for housing sites. And it could be said that the private sector has provided more housing in recent years to what was formerly the gap-group because they're able to produce housing at a low enough cost. With interest rates being lower, they can reach more people that the marketplace formerly shut out. But that "gap" will go right up again. The upper limit to the "gap"will go up as soon as interest rates go up, bothfor"take-ouYfinancingandconstructionfunds. Developersaren'tgoingtobeabletoprovidehousing in that target area. Also, the buyers won't qualify for "take-out" financing, so it's going to be a constantly fluctuating thing. But I'd say, to really talk about affordable housing for people, it takes government assistance. 49 ~f~n't ~r+s~t+~ ~ s~ #or, ~I~'~rp~d~#~~~~a~+'s~~~' GIVEN THE THREE GENERAL TYPES OF DEVELOPMENT PROJECTS--RESORTS, COMMERCIAL/INDUSTRIAL/OFFICE BUILDINGS AND RESIDENTIAL DEVELOPMENTS--WHAT KIND OF INFRASTRUCTURE OR HOUSING IMPACT WILL BE ASSOCIATED WITH EACH OF THESE? Whalen: I would say that residential projects certainly create a demand for schools, unless it's a specialized housing project for the elderly. They'll create a need for police and fire protection and recreation space. They don't create a need for affordable housing. They erg housing. They don't create a ~t~ for affordable housing. If it's entirely private sector-financed, it's not likely to include affordable housing in the sense that I have just defined it, unless they do happen to have Hula Mae financing. WHATDOYOU THINK ISTHE REASON FOR EXACTING SUBSIDIZED HOUSING REQUIREMENTS FROM MARKET HOUSING DEVELOPMENT? Whalen: Well, I think it's a matter of convenience. Convenience and habit. This approach started in the City and County because the State Land Use Commission, when adopting boundary amendments for the Urban district, started requiring a "set-aside" of 10% of the housing units for low-and moderate-income families. It wasn't very well defined in the early stages. As that moved to County approvals, the requirement was picked up and has now become quasi-official. Quasi-official policy. Unwritten, but nonetheless real. And the term, "low- and moderate-income" has taken on greater definition. There's no basis fora 10%set-aside, really. It was just something that was created and has been passed on from "generation to generation." AND GROWN TO 60%? Whalen: Yes, well now it's higher, and occasionally there have been some aberrations. You know, it's goneto 15%in some cases. And in Waikele itwas 40%or 50%--I forgetwhich--depending on the different scales of income groups being served. I'd say, within the past two or three years, there seems to have been a greater degree of "imagination" used in how to exact affordable housing for residential projects requiring rezoning. But only those, of course. Those are the only projects that are affected. WHAT KINDS OF IMPACT WOULD OCCUR WITH RESORT PROJECTS? Whalen: Resort projects also create a demand for recreation space. They create the need for transportation improvements, water supply and sewer facilities. There's probably a somewhat higher demand per capita in water and sewer for visitor facilities. I believe I looked at that once based on some empirical analysis. In part, that includes more potable water, and also water for irrigation. Resort areas are generally high water users for irrigation. It doesn't create a demandfor schools, particularly, but it does potentially create a demand for affordable housing. UNDER WHAT CIRCUMSTANCES? Whalen: I would say primarily if it is in an areawhere there is little or no affordable housing available near the resort area. If the aim of government planning is to minimize travel time to employment centers, if you have a major employment center, it's wise to consider employee housing needs for resorts, where the people will fit that low-moderate Income category. The tricky part, of course, is because Hawaii has such a high percentage of two working spouses in a household, it's really unclear whether that employee is really in aloes- or moderate-Income household. You can make some false assumptions about household characteristics based on the employee's salary. 50 WHAT ABOUT INDUSTRIAL/OFFICE SPACE DEVELOPMENTS? Whalen: I would saythat they have somewhat similar infrastructure demands as resort areas. There are somewhat different traffic generation characteristics, depending on the location. To the extent that industrial and office space developments are located in already urbanized areas, they're going to be different from resorts, which tend to be in more outlying areas, with the exception of Waikiki. They potentially have an effect on demand for affordable housing, also. However, again, if they're in already urbanized areas, the need for affordable housing is a little less direct because there is already, in most cases, an adequate housing supply in the area. So that the travel time criteria is relevant. Take, for example, the high-tech park in Mililani. There is an industrial project which I read recently will provide potentially 14,000 jobs, because of the shift labor involved. That's about twice as many jobs as Ko'Olina Resort. There was no discussion of affordable housing needs relating to this high-tech park, although a large percentage of jobs aren't particularly high paying jobs. They are assembly-line types of jobs that are middle level, if not low-skilled labor. So there could easily be affordable housing needs attached to the development of a new industrial center in a suburban area which has a limited supply of housing in the affordable range. WOULD THAT BE BECAUSE OF THE PROXIMITY? Whalen: Right. You know, there are some other things which resorts and office and industrial developments create demand for, and that is social services of some sort. The demand for child care facilities, for example. Private sector can provide child care opportunities, but it's often difficult if there isn't some way to facilitate it, or some kind of incentive to provide for child care. And this sort of ties in with the affordable housing issue. If, for example, a resort area were located in a region where there has been chronic unemployment orunder-employment particularly in some of theolder,rural areas where there had been a plantation community, instead of emphasizing affordable housing or employee housing, the other approach might be to create a job training counseling and placement program. So that gets back to the difficulty I see in trying to compartmentalize issues, because there are a lot of inter- relationships, particularly in the social aspects. You almost need to develop a strategy for handling this. I mean, if you really want to create a new town, around a resort destination or an industrial park as your employment center, your magnet for people, you can create a residential community around that with a range of housing types and prices, or you can orient your new project to an existing residential area and try to draw you employees from that area. But often, you need to think about how you're going to do that. So it's not very simple. People really need to sit down and think about how that's all going to tie in together. But even an infrastructure need too. Imean,therearealotofdifferentapproachestoproviding, for example, sewage treatment. Instead of having asewage treatment plantwith an outtall,where you lose all of this potential irrigation water, instead of tapping affordable water supply for irrigation needs, what about using secondary effluent for irrigation? WHATPLANS DOYOU HAVE FOR PROVIDING INFRASTRUCTURE OR AFFORDABLE HOUSING? WHAT KINDS OF ORDINANCES DO YOU HAVE ON THE DRAWING BOARDS--ARE YOU GOING TO PROCEED WITH THE CBA? Whalen: Well, that's the only bill, currently. DLU is in a strange position relative to this whole complex of issues. We're kind of at the end of the line. What has not been tied together, we try to wrap carefully and pull up those loose strings that must be tied together. I think that there are things on the books. There is an infrastructure plan, if you will, the Development Plan public facilities map. There is a time schedule attached to it and we know what the capacities ought to be, and so forth. The problem is in the implementation of it. Who does it? If the timetable doesn't fit a new developer's plans for building according to a certain schedule, then you get into who pays and when. It gets even more complicated when there are two or three landowners in the same region that are depending on the same basic infrastructure. There isn't really a system in a situation like that, where you have two or three developers in the same region to tie in together. If you have a situation where you have a single landowner, as we do in Ewa plain, one might hope that that might be the instrument for bringing it together. It hasn't always 51 worked that way. An assessment district might be appropriate to actually get all the parties together-- both the major Landowner and all the people who have optioned out some sort of development rights. t~r~~~ be pr~,~~s~t~ ~J~et ~~~~tl~ ~rr~~i~ayrrt~l~at fin. f yrp~~c>< S8y Whet /t fNQ~Jt# #atl~s to ~ telrJ~r 1slrgQ prrJ~ct. #dAn';t i~lnk ~ f~ant #~7 tau. etrsr~r sajn~le rf~w camint,~rcl~ax#u#td~'~?>~' #I~In br~l'tr.. _tt ~+Ettrltl ~rr~#~+b#y #sl~sl~+s+d r, tlrt~r 8~res! or pal#e~~dr~t flr~ar' al~.` WHAT PLANS DO YOU HAVE FOR THE CBA AT THIS POINT? Whalen: My plan is to not wait any longer to see what City Council does with it, and to go directly to the Transportation Services Department and Housing Department to say: "Well, since there doesn't seem to be anything coming out of this, what is our next step? Do we want to proceed?" As I said, we already have a park dedication fee. We have a water services development charge. We have a bill at the City Council for sewer impact fee. I think there are two major elements that are missing. There is some kind of transportation impactfee--which could encompass more than just road construction; it could even involve mass transit--and something to deal with affordable housing. It might encompass more than just affordable housing, taking a look in cases where there is a strategy to provide employment opportunities for local residents and sort of tying that to it. THAT SOUNDS LIKE THE COUNTY COULD BE MOVING TOWARDS A SAN FRANCISCO OR BOSTON MODEL, OR COMBINATION BETWEEN IMPACT FEES AND LINKAGE PROGRAMS. WHAT KINDS OF PROJECTS DOYOUTHINK WOULD BE SUBJECTTO THE HOUSING OR SOCIAL FEE? Whalen: Well, I would say that, for affordable housing, itwould only be projects that create employment. And I would say that itwould have to be a fairly large project. I don't think we want to touch every single new commercial building being built. I don't know exactly what to suggest as the threshold at this point. It would probably be based on floor area or potential floor area. DO YOU THINK IN THAT WAY WE WOULD BE MOVING AWAY FROM THE HOUSING EXACTION ON RESIDENTIAL DEVELOPMENTS? Whalen: Well, I think that it would be wise to do that. But I think there is a lot of custom that has to be overcome. I'm asked from time to time by Council members whether, for example, it is our "policy" to require a housing set-aside for land that is being rezoned from, say the Agricultural district to Country district. And I reply: "Well, I don't know, is it our policy?" I don't know. Where is it written? ARE YOU CONCERNED AT ALL THAT THE COST OF IMPACT FEES OR HOUSING EXACTIONS CURRENTLY BEING DONE WILL END UP WITH THE ULTIMATE CONSUMER OR THE HOUSING PURCHASER? Whalen: That's a very difficult question to answer because 1 think it really depends upon the individual cases. I think ft's probably easier to absorb if it's assessed very early, or if it's known up-front. BY'ABSORBED' YOU MEAN INCORPORATED INTO THE LAND COST? Whalen: Yes. It really depends on so many external factors that are difficult to know. If it Is at a point in the market where developers have greater potential for profit margin and they want to sell the units quickly, they'll just reduce their profit during those periods. But there are other periods when they just cannot 52 absorb it, and they'll pass it on. if the market will bear it, they'll pass it on it they can. I think it will be very difficult to really show exactly what is passed on and what's absorbed. But I think that certainly the potential exists for it just being passed on. WHO DO YOU THINK SHOULD PAY FOR THE COST? Whalen: Well, I do believe it is an overall community problem and I think it should be a combined effort of private sector and government. I don't believe in complete laissez-faire because I do think that, unless government intervenes in some way and imposes certain requirements, as well as opportunities and incentives, that the incentives can often be abused and not really promote what you want. So I think that I don't see any particular reason that it should be the responsibility of the private sector to provide affordable housing entirely on its own. It's got to be a combined effort. IN TERMS OF IMPACT FEES OR LINKAGE PROGRAMS, WHAT KINDS OF DEVELOPMENTS WOULD BE SUBJECT TO THESE, AND WOULD ALL SIZES OF DEVELOPMENT BE SUBJECT TO THEM OR WOULD THERE BE A BREAK-OFF POINT? Whalen: Well, I think there should be a threshold. I think, for one thing, there's Just a nuisance value in collecting fees for small projects. The cost-benefit just isn't there in collecting the fees, in addition to which it penalizes the small development because that profit margin is so critical for a small project. On *he ttrrtjay cri'imrss~ctan~{gpn~enL ' ~ 1'I~AY t'~f31r+t>f{t`~j[~t~'F$1!'#tf fib jL#Xd~3t~u~d ~ fir 8lft~ t`~li'! ~f`1~1~1.~I~fLti"t~fi~t'A~ fr:S#k'~ S~`~!{~?l'~#t~~Cr[ ~f$ ;~yait~lb~e~ ~i~tfl~~lr~a~?~~Ir# ~I~~+~rlt~r~~~~s rimptf~,~»ts~#~ tA+~r~~~Yrie g+~t~ prt~E~ter~a~ ~,~d those i?spit~~#~s ~fff`8 ~f~;C Ire >~;t~t Hit C+~rf~(ioly 4h~r~lop>s? wlllaq h~ #~f&~ en itmp~f~l! Cat~~t ~?s sett~ttr# tta ~t'1~r~#~r ~ttt~l~t~`l~f~ #Jtoserlntr~&tru~tt~~e nerds rRn ~h~tf arf3~ WHAT ABOUT THE CUMULATIVE EFFECT ON INFRASTRUCTURE OF A NUMBER OF SMALL DEVELOPMENTS? Whalen: There is a potential loophole there that has to be closed. I think there are some ways we'll be able to look at that. In other words, when a property is developed incrementally. While there is hypothetically that possibility, there areways to mitigate against that. For one thing, it's not really practical for a builder to just build ten units one year, another ten units next year. It's just impractical. As a means to avoid a fee, I think it's not likely to happen, unless the fee is so large that it really is a consideration. That's really the balance that we all have to look for. We don't want to get to a point where people are going to be looking for every loophole in the books to avoid paying a fee. At the same time we don't want, I think, to impose a charge for every single dwelling that's built. I know the Board of Water Supply does charge for asingle-family dwelling. In fact that's what the sewer impact fee would do. For those kinds of things, I thi nk it may be appropriate [tocharge asingle-family dwelling but not for a transportation impact fee. It almost becomes an absurdity to suggest that they have to pay a charge for transportation, for a single dwelling on a single lot. But certainly they're going to add to the cost of thewater supply and sewer system. HOW WOULD YOU SEE AN IMPACT FEE SYSTEM WORKING? ONCE YOU COLLECTED THE FEES WHAT WOULD YOU DO WITH IT? HOW WOULD YOU SPEND THE MONEY? 53 Whalen: Well, our plan is shown in the Development Plan, as to public facilities, and I would say thatwe would try to keep pace with that timetable. And maybe we can move up the schedule for some of those projects. Certainly, if a new development is proposed in an area and the infrastructure isn't scheduled to be available until three years after the project is implemented, then we've got a problem, and those timetables have got to match. But certainly any developer who has paid an impactfee is entitled to priority attention to those infrastructure needs in that area. So that should have a lot of influence on the timetable. GIVEN THAT BOTH THE STATE AND COUNTIES ARE INVOLVED iN VARIOUS KINDS OF INFRASTRUCTURE PROVISIONSAND EVEN MORE SO IN TERMS OF HOUSING EXACTIONS, AS WE MOVE MORE INTO IMPACT FEES, WHAT KINDS OF POSSIBILITIES FOR CONFLICT OR DUPLICATION DO YOU SEE BETWEEN THE STATE AND THE COUNTY? Whalen: I think there is a lot of potential for conflict. Anytime I see a [State] legislative bill with numbers in it, itworries me, because the numbers determine some sort of minimal requirement or aformula. There is a certain rigor associated with those numbers, often having no basis on anything other than the author's good ideas about what ought to be required. I've seen a couple of those proposals floating about. In the way of housing, there again, I never really understood the basis for the 10%set-aside. That same type of thing can be applied to other types of things. Mostofthe infrastructure needsare provided bytheCounty, sometimeswith State assistance, butprimarily by the Counties. In areas where the State is now providing most of the assistance, maybe there should be some thought about transferring those responsibilities over to the Counties. For example, highways. There is obviously a need for a State highways department to receive Federal assistance. But if the Counties collect impact fees to provide for highway needs, there's no reason why the County shouldn't build the highway. The County is just as interested as the State is in appropriating funds for construction of a highway project required to serve new development. We are not going to withhold the money, because we want to see it built, too. So I would prefer to see the State in more of an assisting role. I think that maybe in some areas, where the State has assumed complete jurisdiction, such as in schools, possibly some system can be worked out where the land is dedicated for the school, maybe some sort of payment from the developer. But that doesn't mean that the State has to assume control of the whole gamut of impact fees, particularly if there are facilities that are maintained by County governments. Because when everything is built and dedicated, we are going to have to maintain it. So it seems that we obviously should have some say in how it's built, when it's built and in what manner. ';rIIM~ p~rsc~n~i >ri'~w is H~t~~ ,~.4#8 H~usingt i~trrarnc~ ans~ Cx~fu~tnjr~m~srit Ir~irjrfs~r~tr`t,~J sh~~ld ; b~ t~z~l~tty ilA~y , f1~tn~t~~~~t~~y,~t~~I+~tr~~~.wt~ttw~;~c~~~t ~t~~ ~~#t~~ts Sii~as ~in~ ~t~t^t ~uiit~!`t~~t. . 71+~r~ ;r»t~h# b!~ svm~ tflrrx~tec~f ur~~s w~t~rr~ th.~l State can aon~trtrct .p~bt#~ ;'hpu~Prtg quit Ir,?snt+~&tfy~ they:ar~! rrst CE#17Str##~tir~g p~btfC hf3ustng!.; Tt,e>,~'re t;onstr~r,~rtrf~ g~p~gr+~tt;~ hfJ~Stng!•' 54 In theareaofaffordablehousing,IthinkthattheStatecanplayaverybeneficialassistingrole. My personal view is that the HFDC should be exactly that, a financing agency, and not one which goes out and selects sites and starts building. The Counties can provide for development. There might be some limited areas where the State can construct public housing. But ironically, they are not constructing public housing. They're constructing gap-group housing. In fact, that's been the bulk of their projects. I think County governments are ideally suited to that type of role--actually getting involved in housing development in some form or other. YOU MEAN LOW-INCOME HOUSING OR GAP-GROUP? Whalen: Both low- and moderate-income housing. We have CDBG [Federal Community Development Block Grant] funds we can use. We have a lot of financial tools at our disposal that the State doesn't have. On the other hand, the State has greater borrowing capacity and they can assist in many ways. But I do think that the County housing agency should betaking the leadwith the State housing agency playing an assisting role. Somehow, that's gotten turned around. WHAT DO YOU SEE AS THE ROLE OF THE PRIVATE SECTOR IN HOUSING AND INFRASTRUCTURE? Whalen: The advantage of having the private sector construct housing and infrastructure is that they can circumvent a lot of the cumbersomeness of bid procedures--you know, going low bid" in caseswhere you don't really feel that is advisable. When I say that the County housing agency should construct housing, I don't necessarily mean they should get involved in being a contractor or anything like that. They can do quite a bit to clear the way for a private builder or developer to build the housing. The actual construction, I think, should be done by the private sector. But they [the County] can provide all the planning and engineering, and the permit processing. And other things, such as acquiring the land, assembling it. There are so many of those soft costs, up front costs, that really discourage affordable housing production. That's a cost that can be absorbed by the public sector. We can help clear the way. The private sector can do a very good job of actually building the housing and marketing it. NOW THAT THE GOVERNMENT IS GETTING INTO HOUSING DEVELOPMENT--THE COUNTY WITH ITS WEST LOCH PROJECT, THE STATE WITH KAPOLEI--DO YOU SEE ANY CONFLICT IN THE ROLE OF GOVERNMENT WITH EITHER THE STATE OR THE COUNTYAS DEVELOPER WITH ITS ROLE AS PERMIT GRANTOR TO POSSIBLE COMPETITIVE DEVELOPMENTS IN THE SAME LOCATION? Whalen: Well, I don't see the two as being necessarily competitive. I think that there's a perception among some private sector developers that the State or County's involvement is a potential threat to their market. But the fact is that the State and the City are both undertaking special types of projects: they're quite large projects and they are intentionally mixed-income communities. They are providing a segment of market housing, as well as gap-group housing and below-gap. The mix is in part, because it's good planning to createacomprehensivecommunity. Anotherpartisforfinancialreasons. Butldon'tthinkthat the State or City should view it as competitive. 1 do think there is a needfor private sector housing, independent of any State or City role. I certainlywould hope that the State and City would not see this as supplanting the role of the private sector, but complementing it. Ultimately, as I say, my view of it is that the State or City is facilitating new development in those two projects, whereas the private sector is going to build it and market it with some Clty assistance. I would like to see it, as a matter of fact, as a way of providing more opportunities for the private housing industry. Under our system of land tenure, and vertical integration of large landowner corporations, and the development companies that they form, in some cases, and the building companies, and even sales offices, there is not very much opportunity for 55 ~~~s~i~~[~ttiu~er~ ".I~7f#~r!t7Ul S'~~f8~1 cif 1~~~1 ten+~r,~, ~~n~tv~rtfc~tznt,~~a~~t~ax~ at~lr~~+ 1~~~t~ner ~~rr~l~rra~#nr~s, ~i~uef~f#m'~nt tro~f$~t~~s tl~gt: tl~tel~r fir, .t~et'~ is ~fd1 very much fp;pf~~t~rffty ?ar ~ ~nd~p~s~rlettt +Ci~/iltf"8(:t{iiC or ~et18ii1 tiuld~r &rri#t! reef est~t~ ~ffrms tt~ Est ~t~>Crt~+~+t#'. st>* f lh;~~.~~nae, i rYti~le~ /~ta~a tt;t~~ t~.S~&I!~ fsr C#3t7~d' prgv;gd~ more t?~3~'1~'3?'~'#~;E'I'~~'~~13~4 !`i13~' the ; ~t';~M~IiE~ &eCtt3r_ a ' an independent contractor or small builder or small real estate firms to get involved. There is a tendency to sort of put it all into one company or corporation, so in that sense, I would hope that the State or City could provide more opportunities for the private sector. IS THERE ANYTHING ELSE THAT YOU WOULD LIKE TO ADD? Whalen: There is a bill at the Legislature, which was introduced by Representative Mits Shito, HB 2069 [requiring resort projects to provide employee housing] which started off really bad, because itwas a very quantitative approach and actually quite narrow in the sense that it dealt only with hotels. But it could be a vehicle for State enabling legislation or linkage program, or even impact fees. But I don't know if it will ever come out this Session. [Editors' Note: HB 2069 did not pass the 1988 Legislative Session.] There seems to be quite a bit of intention to get some major bills on housing through this Legislature. 56 MICHAEL RAOON ThefollowinginterviewwithMichaelMoon, DirectoroiHousingand CommunityDevelopment /or the City & County of Honolulu was conducted in writing, and was submitted on June 29, 1988. WHAT DO YOU SEE AS THE CURRENT HOUSING NEEDS ON OAHU? Moon: There's a shortage of affordable housing on Oahu, especially for low-moderate and gap group income households. The current median for a family of 4 in Honolulu is $36,500. By "low and moderate income," I mean families earning up to 80% of the median income, or $29,200 per year. We refer to the "gap group" as families earning between 81 %and 120%of the median income, or up to $43,800 per year. These households are limited as to the amounts of money they can budget for housing; they can afford a home that costs no more than $70,000 for low-moderate income families and $110,000 for gap group families, depending upon the prevailing mortgage interest rate. "~11f' ffStlif3t3f@a fr~diC~#f~ Ih~! t~~!t"s l't3 >~t I~l~l~st '8y~4f/~.i~Epl~~ }taictuBw~ItgQ~~1i ^~f~Jl~ny~~q~y ly~~+~~y~ftp~+~p `tayRaw- 11(V?~SpfiA~~~yeaV Ry{~gi ~pi~,~JM~i`.y~s~{'M'~M~i •~pIll*4~~pQJR1/~~. p1I1RaR~~~}Y rpS~iy~i ~~~i ~/!i SI r'~ (i~;i i/~Y,f ~r Y//~l ~~f~3~R ~~{!,{i i~~~' ~~(,S+iRL t)r ~ W ith current statistics for the City and County of Honolulu showing vacancy rates of about 2%,and average single-family home prices of $198,000, you can see that there are not many apartments or homes that families in these income categories can afford to rent or buy. Our estimates indicate that there are at least 86,500 households falling into the "low-moderate" or "gap group" income categories that are in need of affordablehousingtorentorbuy. These numbers demonstratethatthisisaneedthataffectsalargegroup of people. WHAT ARE THE FUTURE HOUSING NEEDS OF OAHU? Moon: The projected increases in Oahu's population, combined with other growth dynamics such as foreign investment, will make the current need for affordable housing more acute. So there will be a need for more housing units. I might mention that we do need community understanding and support to help us participate effectively in addressing the housing crisis. HOW ARE MOST OF THE HOUSING NEEDS ADDRESSED? Moon: The City and State are actively involved in developing housing for rentor sale, and also administer other kinds of housing assistance programs, such as the Section 8 Rental Assistance Program and Rehabilitation Loan Program. Private developers have also developed affordable housing as a condition of rezoning approvals. The bulk of the overall housing stock has been provided by the private sector. 57 ~n :ttor,~clnn' #or Isaw-T;~tt~i'~t#+~ 1CI~~1t111f' #+1sEti#lflss: "i~l~~' axperi~n~e h,~S s~nwrrt,hst ps tl~fti~~tt ter ?os~-tt~oderalt~ ~n;cnm~ ft#~+tf##s~t;p +~#+~i#~~ f>ar perrrr~lrlent finar~cing!- ~tp}artsximst~ly t to h~u~sel~©ttlswh~ahavesprii~dt~+~~g~re~fr+it to fifty-spFnsQr~d prr~p~ts ~ctuatljr~ t»et t~#a Brie:ia to a6tairr mort~~ges. cwt th~9t7attt~ !i»e is #hs't ~ out of #hs~se4 nc~wzs~~s ahb~n>$.* ' DO YOU THINK THAT NEW HOUSING SHOULD BE HOMEOWNERSHIP? Moon: Homeownership for gap group families works fairly well. Homeownership for low-moderate income families is a little more difficult to achieve without some subsidy to write down the costs of the units. However, the City has tried to give homeownership opportunities to this group. DO YOU SEE A GENERAL PROBLEM WITH SELLING TO LOW-MODERATE INCOME FAMILIES? Moon: Our experience has shown that it is difficult for low-moderate income families to qualify for permanent financing. Approximately t in 4 households who have applied to acquire units in City- sponsored projects actually met the criteria to obtain mortgages. But the bottom line is that I out of those 4 now owns a home. IS THERE ANY HOUSING IMPACT ASSOCIATED WITH RESORT DEVELOPMENT? Moon: We recognize that resort developments benefit the economy by creating new jobs. However, you could say that resort developments also add to the need for affordable housing. HOW DOES A RESORT DEVELOPMENT CREATE THIS NEGATIVE IMPACT? Moon: The probable increased market values of residential properties in abutting neighborhoods can make it difficultfor employees of the resort and ancillary businesses to obtain housing close to their place of work. WHAT IS THE HOUSING IMPACT ASSOCIATED WITH COMMERCIAL DEVELOPMENT? Moon: The same as that associated with resort development. HAS THE CITY THOUGHT OF INSTITUTING SOMETHING SIMILAR TO MAUI'S EXACTION ON BUSINESS DEVELOPMENT? Moon: In November of 1986, the Administration proposed a bill for a Community Benefit Assessment ordinance. This bill would have attempted to address the impacts resulting from all types of development, including business development. The City Council is still reviewing this proposal. THE LAND USE COMMISSIONTARGETSAFFORDABLE UNIT SALESTOTHE GAP GROUP. ISTHE TARGET GROUP THE SAME FOR THE CITY? Moon: The target group is almost identical, except that in the past the City has placed much emphasis on the low-mod group. New City "for-sale" projects have targeted the gap group, but included low-mod and market units in the projects. 58 +€ur houtafnfl exact s lmnosetl nYt ftiivrst~ dev1~~}~_nta a t$~#liZe that same;; ~etre~opers are un~orntt~~tsihl~ t~rFi~ ire#ng ~8Q([llet>i t~} i~BYB#Q#~ ~/tt~f~~rt?#i~ i~~31/3~tl~ ~/e ~I#sa ~C~f7~€>W#B~~~ #ft#;~t #f~ ~DJ??#? ~BSeS tt is {~t8sf~fr : ~L7t' gat?ernr~ee~t to plroctut;a :ern#ts for #a~±~reatlerl~~r #»~~me anr~ g,s~ group l~ra~f#e~. #`,r~~retar~t, rt bec~a~esttte prfuert~ se~trr~ ra sf~pport us ~n otrr e##arts to deu~slap efft~rt~t~bt'~ t?At+`~tf~. TJ~IS GCtGFIf`f re#~resenlt l7ine fCi #+assBa ihe'ne~ed tq #mpase hp~X&Fn+,# ~exalcltlan~>3n prPtret,s dleYaicsp~~r~rs.' WHAT DO YOU THINKA DEVELOPER'S FAIR SHARE FOR PROVIDING AFFORDABLE HOUSING SHOULD BE? Moon: You tell me. Each developer works under different parameters. For example, one may own the land, while another must purchase the land. In addition, each site will have unique conditions to address in order to be developed. Consequently, land and infrastructure costs differ from one project to another. Therefore, across-the-board requirements may not be totally fair. Until something better can be devised, however, the 10%exaction currently being required through unilateral agreements is an effort to address the problem. We realize that some developers are uncomfortable with being required to develop affordable housing. We also acknowledge that in some cases it is easier for government to produce units for low-moderate income and gap group families. Therefore, it behooves the private sector to support us in our efforts to develop affordable housing. This could representonewaytolessentheneedtoimposehousingexactions on private developments. WHAT PLANS DO YOU HAVE TO PROVIDE FOR FUTURE HOUSING NEEDS? Moon: The City is trying to provide as comprehensive a housing program as possible with the limited furids available for housing. We are trying to address the housing needs of special needs groups, which include the homeless, handicapped, elderly, abused spouses, and persons with mental retardation or mental illness. Persons in these groups are often better-served if provided alternative residential programs, such as group living facilities or shared housing. The City is attempting to support these alternative programs by working with non-profit service providers and housing developers to develop small-scale residential projects appropriate for special needs clients. We have assisted with these projects by acquiring the land for the projects, subsidizing the site work, and/or funding the construction of the facility. We are proposing new rental developments which provide an economic mix of tenants--low/moderate, gap and marketincomefamiliesalllivingtogetherinthesameproject. New homeownership opportunities will become available through the development of West Loch Estates. West Loch Estateswill also contain a 150-unit rental project for the elderly. In Palama, we are initiating a neighborhood revitalization program which will ultimately upgrade the deteriorated and inadequate infrastructure in the area. Concurrently, homeowners will be encouraged to rehabilitate their units, where needed, with our low-interest loans in an effort to preserve the existing housing stock. We also plan to construct some rental units for families in the neighborhood who must relocate due to the demolition of their dilapidated units. 59 IN TERMS OF HOUSING EXACTIONS ON PRIVATE DEVELOPERS, WHO WILL BEAR THE COST? Moon: Initially, the developer will bear the cost. I would guess that they will eventually be passed to the consumer, but you really should ask developers this question. DO YOU THINK THAT AN IMPACT FEE SYSTEM OR HOUSING LINKAGE PROGRAM SHOULD APPLY TO ALL DEVELOPMENT REGARDLESS OF TYPE OR SIZE? Moon: The requirements of these programs could apply to all types of developments. However, the requirements should take into account differences among development projects. GIVEN THAT THE STATE AND CITY ARE BOTH INVOLVED IN HOUSING, WHAT POSSIBILITIES DO YOU SEE FOR CONFLICT OR DUPLICATION? Moon: The needfor affordable housing is so greatthat it should be addressed by all levels of government- -Federal, State and County. Both agencies, I think, are administering housing assistance programs appropriate to the types and levels of resources available to them. THE STATE HAS INCREASED ITS HOUSING EXACTION. HOW WILL THAT IMPACT ON THE CITY AND THE PRIVATE SECTOR? Moon: It's another approach. We'll have to wait and see what happens. WHAT DOYOU SEEASA NEED FOR STREAMLINING COOPERATION BETWEENTHE STATEAND THE CITY? Moon: The urgency and magnitude of the current housing crisis demands that we work cooperatively to address the need for affordable housing. The Mayor is committed to the development of affordable housing for a range of citizens. We have recently seen the State's major commitment of resources to housing. Working together, we may be able to solve a part of the problem. 60 GHRtST'OPHER'L. HART This interview with Christopher L. Hart, Planning Director of Maui County was conducted on March 4, 1988. 'TIIB:~S5i1~ i7R~ ~1~X?w~p tt"$lf~#3i;?~`t~l##`~ir~`~ ~$;f t~~~ paint,t~~a~~b~ib#~tfe~r~~?s_ttllti't#~r~#t~~~~ra~~r~t tan ~~C~~ ~~'xd 1~'s nn ~~&Yt~ ~{tt # r~;i~' prnmtnenlt !n w~syt M~~t1 die ~t ItiF!@ ~r~w;?A ~i IN TERMS OF INFRASTRUCTURE, WHAT DO YOU SEE FOR MAUI COUNTY AS THE MOST PRESSING CURRENT NEEDS? Hart: The issue of highway transportation, at this point, is probably the most difficult issue that we face, and it's an issue that is really prominent in West Maui due to the growth of the visitor industry. It is also prominent in a couple of other areas. One specifically, being the roads linking Kahului and Wailuku with the Upcountry, Pukalani-Kula area, which is growing quite rapidly. Traffic isalso developing to somewhat of anear-capacity level on Hana Highway, related to Paia and Hookipa Park. There's a bypass that has been proposed there for many, many years. I think the most pressing issue is probably the State arterial transportation issue. DO YOU THINK TRANSPORTATION WILL CONTINUE TO BE A BIG ISSUE IN THE FUTUf.c? Hart: I hope not. We're working with the Maui Economic Development Board, and we're going to be participating in a symposium in late 1988 on transportation. We're trying to get an understanding of where a place like the City and County of Honolulu is, and what our growth potential is, and to see H that's where we want to be in the future; (if we want to be where the City and County of Honolulu is at this point in time). There's a school of thought thatfeels that we shouldn't be experiencing Mauifrom 6-and 8-lane hfghways with elevated viaducts. Essentially, we should be looking at a highway cross-section of not more than 4 lanes, but if that's the direction thatwe're going to go in, then we have to establish some intermediate goals where we begin to move into alternative modes of transportation; where we definitely have implemented a transportation management program for our hotels and other industries, for employees; where we have worked with the hotel industry, the Department of Transportation and the car rental agencies to have at least all of the hotel guests picked up at the airport and transported in a more efficient mode of transportation. We have to begin to look at some form of bus system, and I think, initially, it will be buses generated from the resort destination areas back to the basic communities like Lahaina or Kihei and up to the Kapalua-West Maui Airport and back. We have to look at strategically-located modal transfer points for cars. We really have to begin to do some things that are going to ease us out of a dependence on inefficient single-rider automobiles and bigger arld bigger highways. This will require a lot of public relations. A lot of community support. If that's the way Maui is going to go. So when you ask me, "Is transportation going to continue to be the big issuein thefuture?" I hope it's not. Because right now we're 61 even increasing our parking requirementfor apartments, for instance, because we don't have any kind of public transportation. It's important that we have at least two stalls per unit available, and that's not necessarily in the best interest of a good quality project. To have all the asphalt and more and more requirements to accommodate the automobile, it's not going to be in the best interest of what we feel is a good quality of environment. DO YOU THINK THAT THIS WOULD ALSO LEAD THEN TO SOME GROWTH CONTROLS IN VARIOUS RESORT AREAS? Hart: Yes. From our point of view at this juncture, in 1990 we have to amend our General Plan that was adopted in 1980. There's no growth management policy or section in the plan. It's basically a word document consisting of objectives and policies for basic growth and development of the facets of our community. Butwereallyhaven'taddressedtheissueofgrowthmanagement.That'swhatwefeelwehave to embark into; that'sthewholearea. Maybe the kinds ofdecisionswe'regoingtobemakingcouldbelike the decision that was made with regard to Hana Highway, for instance. We have made a decision with the State of Hawaii that essentially, that road is not going to be changed. It's going to be improved, made more safe, paved, but it's not going to be changed. It's not going to be realigned, it's not going to be designedfor higher speeds and soon. That may be the kind of thingwe're going to be doing [elsewhere]. ~IIEtI~.'~ht~li@~1~.ttg'4i~: ! t~9 h#>r~ ~ ~~fte~~f »e~ltl ~s#;r~ct~l~~]j~ rn places ~#k~ ~fte~t Attu?. i .4pp~'c~xirnstaly 4~ID+~ to ~,#i~!d paapfe? per da] C~lfffi'ML11ta;~~G1 W+e;'~l M~tJI ~1~~ ("pla5t~i'!#iflt4Xe' »dt a real X~ausl»g ~»v~r~tary r'ni tha~'~I ~~,Fh co~satant str,ass. bt3flare~rl tll:~ pres~rastit~r? #31f i~~f~Cart~[Ul~ Q~'! 4Yt8 SIi~~R +8J7>~ fhB {~~St~f$ atQ ~t3~:(JS Sa]i~x 8Xp$!)t~ VfSPtlr^3i" flt'!@t#tred ty~~QS ©f fa~tl#fteS" WHAT ABOUT THE CURRENT AND FUTURE HOUSING NEEDS? Hart: Well, as you know, we have a critical need especially in places like West Maui. Approximately 4,000 to 5,000 people per day commute to West Maui [from other parts of the island]. The reason there's not a real housing inventory out there is the constant stress that has been experienced, over time, between the preservation of agriculture on one side and the desire to, let us say, expand visitor-oriented types of facilities. It's our fault in one sense. In 1980 when we were doing the community plan we made a strong proposal for a bypass, but it was the Citizens Advisory Committee, together with the ILWU and others, that saw to it that it wasn't part of the plan, and the reason was a perception that if the bypass went in that everything on the Oceanside would be urbanized, and that itwould be the demise of the agricultural industry, an industry that we support. So you have this constant tension--conflict--going on to maintain agrlculture as a viable part of the economy of West Maui. We haven't had the land area available and the options for development that have existed in other areas, such as Kihei. So in West Maui we definitely have a housing need and in this same context, the need for the bypass highway. In response, the Planning Commission has gone on record over an SMA [Special ManagementArea]yermit issued for the Kapalua Village Hotel (the Ritz-Carlton Hotelj, thatthe hotel won't be able to get a Certificate of Occupancy (to operate) until the fourth lane of lower Honoapiilani Highway is constructed. From the standpoint of scheduling, it's going towork out. The hotel is going toopen about 62 six months after the fourth lane's projected completion date. More importantly, in the same staff report and decision by the Commission, the remainder of the hotel development at Kaanapali's North Beach projected by Amfac is not going to be able to be available for occupancy until after the bypass is finished, which is in the 1992/1993 timeframe. Sofrom an administrative (Planning Commission) decision-making point of view in the context of the Coastal Zone Management Program, this is the strongest statement that has been made regarding the impacts of growth in West Maui. Now, we are trying to encourage private and public housing. To date, the Planning Commission has approved about 500 rental units which should be available in approximately twelve to eighteen months. We are big on trying to encourage more housing. We have also tried to encourage some commercial development in strategic locations where It would have a positive impact on traffic conditions. In other words, if you are living in an area such as Napili, and have to drive back into Lahaina town to do shopping, the thought is that we should encourage the development of a more efficiently located sub-regional commercial shopping center in an area such as Kahana. It was identified in the community plan and we encourageditsdevelopmentbecausepeoplewouldn'thavetodrivesofar. Wearealsoencouragingsome industrial development because there is a need, and we feel that ff there are more opportunities for that kind of employment in West Maui, it could also have a positive impact on the traffic conditions between Lahaina and central Maui. We've also been very supportive of the Kapalua-West Maui airport and thus far, it's been a positive contribution. DO YOU MEAN AN EXPANSION OF THE AIRPORT? Hart: No, the construction of it. Its relocation and the effort to define a site and getting the zoning and other permits. It was a difficult process, and our administration really stuck its neck out. It's been in court, but essentially all of the legal issues have been resolved and it's now looked upon as being a benefit in West Maui. It's a more technologically advanced form of transportation, and ultimately we feel it's going to have a positive effect. I n Kihei, as far as highways are concerned, we do have Piilani Highway as a basic arterial, and we also have a lot of land area zoned for development. In other words, land that's in the Urban district and zoned that can be available for housing, and so we have a lot of development activity out there at this time. We have tried to shift the emphasis from West Maui to the Kihei-Wailea region. Last year, application for the development of four hotel sites at Wailea occurred due to ideal economic conditions. All four sites were sold during a short period. Wailea Land Development Company had been trying to market them since 1973. Actually the last hotel was completed in 1978--thatwas the Stouffers Wailea Beach Hotel. From that time Wailea had been trying to market the four sites, which have been zoned for more than twelve years, and it was last year that they were all simultaneously purchased. So we have successfully shifted the emphasis of growth to the Kihei area and in doing this, we also felt the need to establish a permanent inventory of employee housing. We have on Maui a really good permanent inventory of senior citizen housing, Hale Mahaolu, and we have been successful in producing about eight hundred single-family house-and-lot packages, and it's going to be almost a thousand units by the end of 1988, through our Housing Division. THESE ARE COUNTY-BUILT HOMES? Hart: Yes, but this is over several years. What happens is they are basically sold on a cost- recovery basis. In other words, the cost of construction of lot improvements is usually $25,000 to $30,000. The cost of building the house, which is an architect-designed home, is about $45,000 to $50,000. So you are talking about a price somewhere in the neighborhood of $75,000 to $85,000 per house. We sold seventy- twounits in West Maui, and theywere sellingfor below that. Theywere about $75,000 and the equity, just by virtue of signing the mortgage, could be $40,000 to $50,000. In other words, an individual might buy the home for, say, $85,000, and it may be worth $105,000, $115,000 or more. 63 DO YOU HAVE BUY-BACK PROVISIONS? Hart: We do, but let's say, two years down the line a marriage might break up. The home is appraised based on the real estate market, and its value maybe beyond whatwewouldconsider aslow-or moderate- income housing. So I'm not saying that we never exercise the buy-back; we have on several occasions, but on several other occasions we have declined to exercise the buy-back option, just because the price no longer qualifies for that gap-group. So whatwe're trying to do is create a basic inventory of rental units. We have about 200 units of apartment rental housing now on Maui. In considering this, we looked at our former housing policy administered through the Coastal Zone Management Program, which is administered through the Planning Department. It's not an ordinance; it's a resolution adopted by the Planning Commission, and we determined thatwe would stick with our ratio of one unit per six hotel rooms. That was based on a study done when the Stouffers Wailea Beach Hotel was built. And that was approximately 16% employee housing. I n other words, if you are look ing at the State's approach of having a range between 10%and 60%for employee housing for moderate- or low-income families, Maui County is somewhere around 16%. If it were one house for every five units, it would be 20%and so on. IS THIS A CONDITION ONLY ON RESORT DEVELOPMENTS? Hart: Yes, only onresort-hotel development, and so the requirement is that each developer has to provide one rental unit for every six hotel rooms. IS THERE AN IN-LIEU PROVISION OR FEE? Hart: No, that's it. Each hotel developer has to execute a Housing Agreement with us. It has to be dedicated in perpetuity as employee housing for that particular project. Now what's happening is thatwe have some developers looking to develop their own. They're buying land to develop housing with money borrowed to build the hotel; they get the money at a cheaper rate to put into developing apartment-zoned property in Kihei for that purpose. They basically absorb the housing into the cost of the hotel. There are other developers that are looking to lease housing. But whatever the system is, we're going to go along with it provided the agreement is executed by the ti me the [certificate of ]occupancy for the hotel is actual ly issued. The housing has to be in place and the agreement has to be executed. In addition, we know that in a lot of cases the hotels are going to be subsidizing the housing, so we're trying to work out some rational subsidy program, and we also know that it's going to be a definite asset to each operator at this time, because our unemployment rate is about 4.1 The available housing wil I attract employees. Some hotel operators are probably going to provide more housing than required. We've also run into the question of will we allow dormitories? Be assured that we will, and there is one project that is looking at this possibility right now. How will we determine the credit for a dormitory unit or a studio unit as compared to a three- orfour-bedroom unlt? We feel that a dormitory unit would count as one unit, and a studio unitwould count as one unit. If itwere afour-bedroom unit, itwould countas one unit, and our strategy there is hopefully you would get developers using maybe three- or four-bedroom units as amini-studio dormitory. SO YOU SEE [A NEED FOR] AFFORDABLE HOUSING AS AN IMPACT OF RESORT DEVELOPMENT? Hart: Definitely. WHAT OTHER KINDS OF INFRASTRUCTURE DO YOU SEE AS AN IMPACT OF RESORT DEVELOPMENT? Hart: Well, we definitely have a sewer impact. In the Kihei area we have a good sewer transmission system, but our treatment capacity is low. At this time developers are participating in a wastewater treatment plant development agreement. Obviously, we weren't anticipating the intensity of development in such a short period. It was due to the dynamics of the economy both internationally and nationally, which created the situation. Therefore the County has gotten together ali of the developers, including the owners of the Wailea resort, and other developers in the Kihei area that are currently considering 64 development, and they have hammered out an agreement. Each developer is going to participate in the actual increase of the capacity of the treatment plant as part of the ongoing process of constructing infrastructure. The improvements will have to be available at the time of occupancy. HOW WILL LATER DEVELOPERS PARTICIPATE IN THAT? Hart: Well, that's where the sewer assessment fee is going to come in. There is aCounty-sponsored fee, which is before the Council now. That's the approach that Maui County has used. Through impact fees, we would have to adopt such fees by ordinance, but the Board of Water Supply, in their rules and regulations, has established a storage assessment fee an d a source development fee, and every developer pays that. That's been ongoing. We also have our park assessment fees and we are now back into sewer assessments, but it's not set up the way the impact fee program is set up. We definitely know that there are impacts of the visitor industry development and for that matter, any development, but we have never endeavored to understand the basic impact on a more comprehensive, broad scale. What we have tried to do is isolate the impact, almost as it relates to an individual project, or let's say a group of projects that are going to have a severe impact at one point in time. So it's always been a negotiated effort on Maui County's part. For instance, when Wailea and Seibu wanted to develop, there was no water in this arid part of Maui. A consortium or joint venture was put together, which included Alexander & Baldwin, C. Brewer and Seibu, and they built athirty-inch diameter water transmission line from Wailuku to Kihei/Wailea. That is an example of the kind of approach that Maui has used over the years. IN TERMS OF COMMERCIAL OR INDUSTRIAL PROJECTS, WHAT KINDS OF IMPACTS DO YOU SEE ASSOCIATED EITHER WITH INFRASTRUCTURE OR WITH HOUSING? Hart: Number one was housing. We wanted to include commercial and industrial uses in our housing policy, but we didn't have any kind of study to base that on, so C. Brewer has just completed processing through the Land Use Commission an expansion of the Wailuku Industrial Park, and as part of an agreement we made with them, they are going to do a study. Based on that study, we would look at amending our policy, but we definitely feel that there is a need to address that. One approach that's being looked at, for instance, is a shopping complex. You look at the plansfor it, and you have a sense of how many types of uses that are going to be there. So in the approval process, let's say, at the building permit or the SMA permit, you establish a projected number of employees and based on that number of employees, perhaps one unit per six employees, or so, you then come up with a basic interim housing requirement. But then after you have the initial opportunity, we have to leave the opportunity open to go back and re-evaluate that project at the point of view of the reality of actual operations, and how many employees we are talking about. You may have made a projection that ends up 20%too low in terms of numbers of employees, Bowe would go back again and look at it and the same kind of thing might occur with the industrial development, but we are looking to address it. WHAT ABOUT A MORE CONCRETE TYPE OF INFRASTRUCTURE WITH INDUSTRIAL AND COMMERCIAL--DO YOU SEE ANY DIFFERENT KINDS OF IMPACTL' THERE THAN RESORT? Hart: Not really, no. Roads, sewer, water--they all exist. We don't see that there're going to be more impactsfor commercial and industrial as compared to the resort/visitor-type development. They are going to be pretty much consistent. WHAT ABOUT RESIDENTIAL DEVELOPMENTS--DO YOU SEE ANY HOUSING IMPACTS ASSOCIATED WITH RESIDENTIAL DEVELOPMENTS OR ANY KINDS OF INFRASTRUCTURE REQUIREMENTS? 65 ,t knt~rY That we need' an ttnpatKt fee prp~~rr~lim; . but l'm n4t sure !rt tlny ©tNrt tnJnr~ that t+r+e txvt~r~/t~f h8ue tnede iJt/t t)E#tl"el't=f.we lt8d had Q~+EI!~.let'S &Sj?'x flfte#n bf tfM!SnL~f' ~B~rS ~~'L!." Hart: Housing impact with residential developments? You mean in terms of what impacts might be generated? Well, I think there is going to be a traffic impact. Plus, we are talking with A & B right now about Maui Lani, and obviously it's a major project that could add as many as 3,000 units to the inventory in central Maui and again, the sewer system and the basic treatment plant don't have the capacity to accommodate that use. The transmission for water is there but the basic source needs to be developed. So all of these impacts we are looking at with these projects coming on line. We're obviously trying to negotiate, but it's a different approach from the normal impact fee. I know that we need an impact fee program, but I'm not sure in my own mind that we would have made out better if we had had one, let's say, fifteen or twenty years ago. OF COURSE, 1'M NOT SURE ANYBODY DID . Hart: No, I know they didn't butwe may be balancing the windfalls and wipe-outs in thewaywe approach things. IT'S POSSIBLE THAT HAS ALREADY WORKED OUT. Hart: I don't know. The other part about it is the legality of what we're doing. I have a little concern that the system could be abused. OF COURSE, THE IMPACT FEE SYSTEM HAS BEEN TESTED LEGALLY. Hart: 1 know it has and that's one of the real advantages. ..we dvn't agree w1t~ the State rtrtten thiey taut'aUap~It 609b. re~11y be(et±e, based the r~esearett tas'trs d~p?18r that t't sh;~tlidn'f 68 t'nrtre thin 25'96 (affortlable hat~sing requlrernent)_ ' l thfnls after yS1U get t~ieycnd #hat ptafnt, ya.tr can'[ justify the housing as truly serving the lx~wfmt~dert~te impact gip groefp.„ THE REASON I ASKED ABOUT THE HOUSING IMPACT OF HOUSING DEVELOPMENTS: AS YOU KNOW, THE STATE, THROUGH THE LAND USE COMMISSION AND CERTAINLY ON OAHU, THE CITY& COUNTYOF HONOLULU HAVE FOR SOME TIME BEEN PLACING AFFORDABLE HOUSING REQUIREMENTS ON RESIDENTIAL DEVELOPMENTS . Hart: That's true. I see what you're talking about. Well, with Maui Lani, for instance, when they went through the land use district boundary amendment, they have a 10% [affordable housing] requirement, so there are going to be about 300 units required. I'll tell you what we're trying to do with that particular project. We're developing it through our project district zoning and a variety of housing types will be able to be marketed, we believe, at a price that could be considered affordable. In other words, we are experimentingwithtot sizes: minimum lotsize currently in the residential district is 6,000 sq. ft., soyou may 66 be talking about 3,000 sq. ft. or even less. This is the kind of thing I mean. We definitely feel there is an impact, and there is definitely a need especially in these kinds of projects to provide a variety of housing. We've taken that position right from the very beginning, but we don't agree with the State when they talk about 60%. I really believe, based on the research we've done, that It shouldn't be more than 25~ [affordable housing requirement]. I think after you get beyond that point, you can't justify the housing as truly serving the low/moderate impact gap group. ARE YOU CONCERNED ABOUT THE PROJECT VIABILITY? Hart: Yes, that and I just think from the point of view of basic mix that it's possible to have a broad range of unit prices. t7irf witjrh ~ti~il'r~ ki3f i.~~3.'~~ ~ IN~it~!'r $fY9fiV$t' I~l?#~ t+fltiF~ C!^I~ l~jfjE'$d~~~'~~i!~~i? n~3et~~ ~>na It~~r~~ t~~~ ~~~t tl"~trlR~tw.~ DOYOU HAVEANY SPECIFIC PLANS FOR EITHER IMPACTFEE SYSTEMS ORFUTURE HOUSING PROGRAMS? Hart: As far as impact fees, yes. We went to the County Council last year and asked for $200,000 to look at doing an impactfee program in a similar manner as the Big Island's. We felt that it needed to be looked at from a comprehensive perspective and the ordinance was critical. We also felt we should be working with all of the basic components of an impact fee program all at once, but the Council felt that they could do a better job so they took the $200,000 out of the budget and decided to go their own way and do a traffic impact fee. Our advice was that that was too complicated, the computation of traffic impacts. I think it would be a lot easier to work with water, sewer and with other infrastructural needs and [then] move into traffic. IS TRAFFIC MORE DIFFICULT? Hart: It is. To get a model together is not that easy, plus the other issues they run into. Last night's newspaper had an article about it: the criticism is that the major system of roads that are going to be impacted most severely are the arterials, and those roads are developed with State and Federal funds, so if you have local money being generated through an impact fee program, are we going to give them to the State? WHAT ARE YOU GOING TO DO WITH IT? Hart: Yes, what are you going to do with it. ONE OF THE THINGS I THINK EVERYBODY IS CONCERNED ABOUT IS THE AFFORDABILITY OF HOUSING, AND ONE OF THE ISSUES IS WHO DO YOU THINK ACTUALLY PAYS FOR THE COST OF HOUSING? WHERE DO THE COSTS GO FOR IMPACT FEES AND HOUSING EXACTIONS? Hart: As far as the County's housing program is concerned, I would have to say that the developers are paying a significant part, and usually the way they pay is by dedication of land. This fee simple housing program that I was telling you about: basically, the cost of development is passed onto the buyer with no profit margin. DO YOU THINK THAT THE COST INCURRED BY DEVELOPERS FOR THE AFFORDABLE UNITS GETS PASSED ON TO THE REGULAR MARjCET UNITS AT ALL? IN OTHER WORDS, WHAT HAPPENS TO THEIR COST? DO THEY'EAT' i~HESE COSTS, OR DO THEY PASS THESE COSTS ON TO OTHER CONSUMERS SOMEWHERE ALONG THE LINE? 67 Hart: In the context of the land. In other words, a land dedication--the way we have been handling it. It may not be as significant a payment as we're currently assessing in terms of the cost of actually developing land and building units, but it is a cost for raw land, and then the County essentially goes in and gets the zoning and develops the project. Now, there have been a couple of other projects where the Land Use Commission established a basic low/moderate housing requirement, and I feel probably the cost of developing those units at that price was basically absorbed by the project, because there were that many units constructed. 17S',#S1W~£tdL *1 th#~JE' p~r'S~stt~tlif i~~t~tt th~l c~>l+gat#z~e~rsfi~~t~u1f~~7~a~rt~~~~~`~ T~~~;F?as~~a tz; ~ ~'+98pf~n~'f~t3~ltaK ;Et~~ Id~~l~~ ~si~~la~:~ ~ ~I ~~t~rnu~~i~r I think that in a situation where we're actually asking for dedication of housing and operation of housing for a specific employee purpose in perpetuity, related to a project, I have no doubt that the developer pays that, and from the point of view of passing on the cost, he may have to raise his room rates and soon, but I don't think it's a locally absorbed cost. However, in, let's say, a large housing project, [if] you have to take 1046 of your units [for affordable housing], I feel that the low/mod sales prices are absorbed by the whole project. SUBSIDIZED BY THE OTHER PRICES? Hart: Right, I do. WHO DOYOU THINK SHOULD BEAR THESE COST IFYOU COULD CONSTRUCT ITANY WAYYOU WANTED TO? Hart: I think personallythat the developer should bear the cost. There has to be a responsibility for doing business in a community, and I really believe that they should bear the cost. DO YOU FEEL THAT ANY KIND OF IMPACT FEE SYSTEM OR FUTURE HOUSING PROGRAM OR LINKAGE EXACTION PROGRAM SHOULD APPLY TO DEVELOPMENTS REGARDLESS OF SIZE, OR JUST LARGE DEVELOPMENTS? Hart: I really believe there has to be an equity in it. I think that it should apply to all developments. Maybe there has to be a payment in-lieu. We've had a couple of small hotels, for instance, forty-eight units. So you're talking about eight units. Right now, we're asking them to provide the housing, but I really believe that everybody should participate. We've talked about the point of view of equity and requiring housing for commercial projects. If a "mom and pop" built a store, would they have a housing requirement? I think from an equity point of view they should have, but it may not be in the context of building a unit. THIS NEXT QUESTION GETS BACK TO YOUR ISSUE OF A TRANSPORTATION ORDINANCE HERE. STATE AND COUNTY ARE BOTH INVOLVED IN INFRASTRUCTURE PROVISIONS AND WITH AN INCREASING DEGREE OF HOUSING PROVISION. WHAT POSSIBILITIES FOR CONFLICT OR DUPLICATION DO YOU SEE WITH THIS? Hart: Well, the conflict obviously comes about in the situation in West Maui and in other parts of Maui, the Hana Highway, and the Upcountry. What we're really talking about here is a deficiency, I believe, in the arterial system, and if you look at that from the point of view that it's funded by Federal and State entitles, is the County responsible for these? I think the problem here is a lack of management. Management on our part locally, and management on the part of the State also in terms of being able to anticipate growth. I think our administration assumes as much responsibility for that as the State has. So I feel there is a 68 t r teEl t11113t"~ ar~€ ~ COt~f~#tt ~~#Jt t ~'~l#'~~ lfl8E1 t'hCtas~t Ip~~l1?y ~lg+iBr~lE~~''; Im}~~ar>~ /~8 ' ritQn~~B Bh;Ct~i#t~t3'~ ~t7 #7 1?~if~'~~~ ;t>~~&t! f~f~'#iri~~,~ f~#!#~~~~~ ~ t~~#~',, tA!l~!Y~f~ffi# ~~il~f ~+~~at~y ~+~r~er~lt~d tr~l~~or~~;xl±~r~ ;~;~r~t ~It#e rr ~y.Jn~ 1f~1' pp b ~~.r. ~ ' P~~~7~ ~YJir M~R~ ~Q~ Y conflict, and I feel thatthose locally generated impactfee monies shouldn't go to constructthose [arterial] facilities. In other words, the locally generated transportation impact fee should be used for other transportation needs in a specific area, and they should be County roads. HOW ABOUT HOUSING DEVELOPMENT, THE STATE'S EXPANDING ROLE IN HOUSING DEVELOPMENT? DO YOU SEE THAT AS A CONFLICT? Hart: No, I don't, I really don't. The only problem that I find with the State's role is that there is no cooperation between the basic land agency, the Department of Land and Natural Resources, the Land Board which basically holds the land, and the housing agency. That concept of having to sell the land at the highest value, to me, is wrong. It really is. If they're going to participate in our community to provide legitimate housing for our residents, then I believe they should look at writing off the cost of the value of the land. Either that or [selling] at a very nominal amount. GIVEN THAT THERE ARE POSSIBILITIES FOR CONFLICTS, DO YOU SEE ANY POSSIBILITIES FOR STREAMLINING THE COOPERATION BETWEEN THE STATE AND THE COUNTIES? Hart: Yes, we do. We've had several meetings on that and we would take the approach that we would allow them to use Chapter 359G, 4.1 which is the basic preemption approach to housing where we would allow them to go even though they don't have the zoning, subject to approval by the County Council of their plans, as long as our housing division, which is an administrative function, and our planning and public works departments can review and comment on the plans; then we've already worked with them in the area at Paukukalo near Waihee. The prior administration didn't have too much sympathy for the State and its ability to actually generate affordable housing, so it's only been in recent years that there's been more of an openness on the part of Maui County to be actively involved in pursuing the construction of affordable housing. Now, our Mayor and our administration are really projecting a positive response to the State housing agencies, so we're definitely open to their participation. WHATABOUTROADINFRASTRUCTURE? DOYOUSEEANYWAYSOFCOOPERATINGWITHTHE STATE ON IMPROVING YOUR TRAFFIC PROBLEMS? Hart: Yes, I do. And I really see It more definitely In this administration. For instance, when I became the Planning Director, that was the first thing that I told the Mayor. I n fact, when I made my acceptance speech I said that we have got to be concerned about the pace of the development in West Maui. So I suggested thatwe establish some kind of local body thatwould begin to address the issue of the transportation needs in West Maui, and the Mayor would take the leadership role, which he did. As a result, he brought in the State and during the change in the administration now that Ed Hirata is [head of the State Department of Transportation there's a lot more energy being thrust toward a viable solution. In other words, what the County has done is basically brought together a group of citizens that are actively involved in development, and legislators, and said that there is a problem and we have got to begin to deal with it. The approach previously was that it was a State problem. We have our land zoned and so forth, but it's a State problem. Whatwe have gotto be able to do is anticipate these problems and needs before they become problems. What I really believe is happening is a lot more cooperation. We've had the same kind of cooperation 69 recentlywith the airport [division], with Ed Hirata and Owen Miyamoto. We also had a meeting with Roger Ulveling [director of Business & Economic Development] not tong ago. As we, as a community, move more into the area of growth management planning, we're going to be able to anticipate the needs. If the State isn't responding to the information they're getting from us, to know that infrastructure has to be planned for and constructed in this particular timeframe, we have to tell them that it has to be, so that the communication is there. I think the individuals involved are positive and they're professional, and they seem to understand the need to move in a sense of harmony. WHAT DO YOU SEE AS THE APPROPRIATE STATE AND COUNTY OR PRIVATE SECTOR ROLES IN PROVIDING INFRASTRUCTURE AND HOUSING? Hart: Well, I think Maui County has taken the position that we're a developing community and although we have planned for development, we have not had the revenues necessary to actually do the capital improvements projects to construct the infrastructure. Therefore, the traditional approach has been that if you want to develop, you have to participate. You have to do the actual Infrastructure. But I really feel that that is a symptom of a developing community. Almost any community is going through that timeframe, is going to have to take that approach. I can't see how you do it otherwise, unless you don't develop, so I really believe we are moving into an era where things are more sophisticated, and that is a definite reason why we should have an impact fee program so that we can actually, first of all, anticipate infrastructural needs so that we can do our part to generate the CIP projects necessary to see that they come about. Another part of that is that in December of last year we had all nine of our community plans adopted, so we have a basic development plan program for the County. And this year our department developed for the first time a capital improvements budget that ties in specHically with the implementation items of the community plans. In other words, the projected implementing actions of the plan are setup sc that every department, whether it's the police department, the fire department, the parks department, or public works, are all coordinated through our office with a new form, which identifies how this particular CIP project would actually be a step of implementation as far as the plans are concerned. That's how we did the CIP and I think that it is a very healthy approach. That's the way we want to do it more in the future and, again, the key word in all this is to anticipate, to look where we are going. DOES YOUR CAPITAL IMPROVEMENT PLAN TAKE INTO ACCOUNT BOTH PRIVATELY-AND PUBLICLY- FUNDED PROJECTS, OR ONLY PUBLIC PROJECTS? Hart: We only show publicly-funded projects. Again, for instance, in the Kihei area there's a portion of a public works CIP that's going to go toward upgrading the sewage treatmentfacility, butthere's also money that's going to come in from the private sector. It's in the context of these hotels that are being developed. We're going to participate, but ultimately if we are able to anticipate down the road, we will be prepared. WHAT DO YOU THINK THE PRIVATE SECTOR ROLE IS GOING TO BE IN TERMS OF INFRASTRUCTURE AND HOUSING PROVISION IN MAUI COUNTY? Hart: There's going to have to continue to be a private sector role. For instance, one of the things we're looking at in terms of growth management is trying to basically project our direction of growth. We feel that now that the [State] land use laws are twenty-five years old and we've got our community plans, we really have to think about what's going to happen beyond the first layer of development. What's going to happen to all the ag and the rural and conservation land on Maui? So when we do our general plan we have to basically plot a direction for growth. 70 ~t tht3 ~~~+tt~;i~ il(r1~t~ r~'t. ~ ~n ~v~! t~~ic t~;f fbeif'e~etti*~r~'s~<3Tn~to tie 1a~ ol` prFl~~tle rrr!wnl~p gofrag !nlt~ tyre f»!!r,~s~re~ct~re, 81~tat it s~Q~rttli b~ bey~xsrt the ' Irrict 1es. t .t tvtuf#dt~.`t ~rerit tt~ g81' I~~k~tri ti'1fO S fee tIt#7t LIRA~'~d17 dpi tt~~ Jt~b One of the things we're going to try to do is to really preserve basic open space quality that's created here by virtue of the ag land, and if we do that, the question then is how are we going to do it. One of the areas where we don't feel that we can just take the land use law approach is where you are just going to add another layer of growth by taking out another layer of ag land above the road, and you have all these fictitious lines of demarcation between growth and ag, which really don't mean much. So what we have got to do is look at areas like the area between the Pali in West Maui and, let's say, Lahaina. There is a great vast open space. We feel that we should concentrate growth at Olowalu and do a planned community as a historical settlementarea, and a planned community oriented toward the ocean. WHO'S THE LANDOWNER THERE? Hart: Amfac. We've been talking with them about it, and what we would like to say is that since they're going through reorganization, they have to try to make some basic money decisions with regard to their land. In order to take the economic pressure off of them, perhaps we establish a number, a density per acre and we transfer the density to Olowalu. Now, to develop Olowalu, a large landowner would be able to concentrate the infrastructure. To develop Olowalu there is going to have to be money invested byAmfac to establish infrastructure there. The County may be able to participate, but there's going to be some really significant hard costs that are going to go into that, but it would be less expensive than if they were just going to subdivide all their land and project out over a long period of time. If the developer or landowner wants to participate and wants to do it, there's probably going to be an equitable amount by the County, as well. So I really believe that as you consider development within stabilized, defined growth centers that exist now, there's not going to be a lot of private money going into the infrastructure, butwhen we think of new growth centers, I believe there's going to be a lot of private money going into the infrastructure, and it should be beyond the impact fee. You see that's another part of this. Now how do you do that if we have an impact fee system? Let's say in Olowalu, we talked about giving Amfac the capacityfor 2,000 units of development. Then we basically assess X number of dollars per unit. I don't know--would that be sufficient to develop all the infrastructure necessary to do a new town? IFYOUCHOOSEAN IMPACTFEE SYSTEMTOFUND ITTOTALLY, THENYOUWOULDCOSTTHAT OUT BEFOREHAND. YOU WOULDN'T WANT . Hart: I wouldn't want to get locked into a fee that wouldn't do the job. YES. YOU WOULD HAVE TO COST OUT YOUR INFRASTRUCTURE BEFOREHAND. Hart: And could you create a special fee for a particular type of area? 71 SURE. INDEED, THE NATIONAL EXPERIENCE HAS BEEN THAT EACH GROWTH AREA WOULD HAVE A DIFFERENT GEOGRAPHIC DELINEATION FOR A SPECIFIC INFRASTRUCTURE. Hart: There's another partto this, though. In my view, sometimes it's less expensive for private enterprise to do that kind of construction than it is for a public agency in terms of building a road or a water system, etc. I WOULDN'T THINK SO JUST BECAUSE OF THE DIFFERENCE IN THE COST OF BORROWING. ONE ISSUE THAT SOME COMMUNITIES ARE LOOKING AT NOW IS WHETHER TO DO THE ENTIRE THING BY IMPACT FEES OR ONLY A PORTION BY IMPACT FEES. THE GOVERNMENT MIGHT UP-FRONT THE INFRASTRUCTURE THROUGH ITS LOW COST BORROWING POWERS, THEN RECOUP IT THROUGH THE IMPACT FEES. Hart: I feel that since we are definitely passing through the trauma and the era of the developing community, that Maui County will become more responsible to do more, to bear more of the burden of the development and maintenance of the infrastructure. There is another thing that I was going to mention, along the lines of providing an inventory of rental housing. Our Administration, primarily as a result of the Mayor's thinking, has decided to do rental units that are actually going to be categorized as CIP projects. In other words, we're doing an apartment project. We will begin in Lahaina where there's going to be about twenty units. The strategy here is that basically we would build it, but we would not try to recover our cost. Just like building a baseball diamond or a swimming pool. The idea is that the community needs an inventory of employee housing so it's basically dedicated for that purpose. Then we have anon-profit housing corporation, Hale Mahaolu, and we would like to have them operate it along the guidelines that have been set up by HUD [the Federal Department of Housing & Urban Development] and the Section 8 Housing Program. Essentiallywewould have the money to cover the basic operations and repair and maintenance, and maybe some percentage can go back intoahousingfund. Buttheintentionwouldnotbetorecoverthecostofthefnitialinvestment, which I think is an interesting approach. SORT OF AMORTIZING AND DEPRECIATING OVER A PERIOD OF TIME? Hart: Rlght. And the thought is not to generate too many of these units in one place because of some of the social implications. DESIGN BECOMES CRUCIAL. Hart: Yes it does. Have you ever looked at our Luana Gardens project? It's a nice prototype project. 72 ALBERT' LONG: LYMAW. This interview with Albert Lono Lyman, Director of Planning /or the County of Hawaii, was conducted on April 1, 1988. WHAT ARE THE CURRENT AND FUTURE MAJOR INFRASTRUCTURE NEEDS OF YOUR AREA? ~ Lyman: All aspects of public infrastructure, both County and the State. It ranges from the flood control requirements to just the very basic road, water, sewage. Getting into the State, it gets very quickly into schools, expanded State highways and harbor and airport facilities, expanded hospital facilities, particularly, in northwest Hawaii (North and South Kona and Kohala, as well as Hamakua). WHAT ABOUT THE CURRENT AND FUTURE HOUSING NEEDS? Lyman: Those are also increasing as the economic activity increases with rents escalating, particularly in northwest Hawaii. WHAT'S BEEN THE PRIMARY CAUSE FOR THE RENT ESCALATIONS? Lyman: From my point of view it is the fact that the rental market is very sensitive to change in demand, and there has been a change in demand that has arisen from the construction activity at the Hyatt, and there will also be increased demand arising from the operational phase of the Hyatt. I have come to that conclusion based on what happened on Oahu when the Rent-Plus program was put into effect by the military, which led to military personnel being able to compete more readily in the civilian rental market and even be in a position to pay higher than what had been the prevailing market rents. ARE THERE CURRENT SUBSIDIES COMPARABLE TO RENT-PLUS? Lyman: There are for the construction workers from off-island. They receive a daily per diem of approximately $30.00 on a seven day-a-week basis, for their housing, food and transportation costs. Typically, several construction workers will live in either a condominium or a house and minimize their out- of-pocket expenses, essentially pocketing some of their per diem, flying home for the weekend and being in a better position financially to pay a higher rent than residents are. In cooperation with the Hyatt construction phase, we imposed a housing construction condition and required the contractor to hire a rental managertofacilitate the off-islandworkers' housing, minimizingthe displacement of residents. The i alternative would have been to butld a construction camp, and the factwas that a construction camp would ~ have cost about $2 million at their own estimate to develop. HOW SUCCESSFUL WAS THAT? Lyman: Well, it also led the contractor to concentrate more on hiringworkersfromon-island. Initially they had expected to bring up to 40%to 50% of the construction workers from off-island. They ended up only bringing in, at its peak, 25%. So itwas successful, in that respect, in reducing the total brought in from off- island. They also recruited from the Hilo, east Hawaii side of the island, busing people over on a three- hour bus ride. 73 p~,,,,12r' i 'SU'bS#d#ZBd8tiQl~ffGrl~~4#,#li9tlOfJ~`~~~~I~RSbl3~3>K1 largely prod#eect t~irot+~h 5t~~s Cd~i~~~+ ~sfl~srt$. In 198 liK+e t+tr~rlker~ the ~t~uni*y ;j HQtts#ng, Oft#c~ and fhb pr#ralte ~~~cti3r icy #dent#ty t+at?at pro)+ects; wet~e beltr~t }3#817t1t3+E~s a+ti? !'t iE?~Ca#t1E1' 1r#ear tp 6VI3tt"jilt#R~ t~t* i9i(# t ihOUS#~g ; pr~jeGts wBrB f~~'#L;rt~tBtl tifwa~rds market bus#~f~ and #~~gefy ~t$ tf;!e upp~~` ~i7t~ YOU MENTIONED SOME OF THE INFRASTRUCTURE NEEDS ON THE BIG ISLAND. HOW IS INFRASTRUCTURE CURRENTLY BEING PROVIDED? Lyman: Largely by private sector developers in conjunction with development, and I base my answer on the frequency and amount of County CIP expended over the last five to eight years. In the last five or six years, the County has issued bonds totalling approximately $14 million. What puts it in perspective is the Kohala Ranch project's road and water system improvements for its first phase, which cost about $14 million. WHATABOUT OFF-SITE INFRASTRUCTURE: ROADS, MAJOR HIGHWAY IMPROVEMENTS, FIRE STATION,POLICESTATIONCONSTRUCTION. HAVETHESEBEENACOUNTYRESPONSIBILITY IN THE PAST OR HAVE THEY TURNED TO THE PRIVATE SECTOR? Lyman: It's been a County, State and private sector responsibility. The County is building a new police station in Kona as part of the $14 million bond I mentioned. The private sector has developed for the County a fire station in South Kohala; the State has made major road improvements, and the State is also a contributor to the water source development program on the Big Island. HOW HAS HOUSING BEEN PRODUCED ON THE BIG ISLAND OVER THE LAST SEVERALYEARS, AND HOW IS IT CURRENTLY BEING PRODUCED, PARTICULARLY WITH REGARD TO SUBSIDIZED AND AFFORDABLE HOUSING? Lyman: Subsidized and affordable housing has been largely provided through State and County efforts. In 1985 we worked with the County Housing Office and the private sector to identify what projects were being planned, and it became clear to everyone that all the housing projects were oriented towards market housing, and largely at the upper end of the market housing. WHAT PERCENT DO YOU THINK IS THE BALLPARK FIGURE FOR TOTAL HOUSING PRODUCED SAY IN THE LAST FIVE TO EIGHTYEARSTHAT HAS BEEN GOVERNMENT SUBSIDIZED, VERSUS PRIVATE SECTOR MARKET HOUSING? Lyman: Just as a ballpark figure, 1 would guess less than 5%. DO YOU THINK THIS HAS BEEN A SUFFICIENT AMOUNT OF PRODUCTION TO KEEP UP WITH DEMAND? Lyman: No. WHAT INFRASTRUCTURE OR HOUSING IMPACTS DO YOU SEE ASSOCIATED WITH RESORT DEVELOPMENTS ON THE BIG ISLAND? WHAT NEEDS ARE CREATED? 74 Lyman: Well, the needs that are created are spread fairly much across the board in that creating new job opportunities creates the need for new housing and all the infrastructure to support that new housing. In addition, with the increased visitor population, there is a greater need for not just infrastructure, but also publicservices. Withrespecttoinfrastructure,theobviousisjustthehigherutilizationoftheexistingpublic highway system. With respect to services, it ranges from police and fire protective services to greater demands on existing parks that are highly utilized by visitors. '~~t~#~F ~ I3eYY`8 ~O , lrt~tt~l3 ~ +~I~r#~~~~'~~~r ~I~~it+~~~1= ~ltO ~n~~~rtf^~?f~ar~GI~~Y~~~~st~~r~rj~r~'r~r~ ~ll;~t,i+~~~c ~iGt3vitl~s fr~t~~~ >~~t~~~ it~~t~' ~ar~ se~+e~tar~. T~~;p~~~~~~ e~tsrit~>tc ~~t1vl~;r~'s w+~~:~~' b~ ~J'~~ iFfi1;~ rya ~r ~lr~s th~l+~ tN'of~/c~i ~ t~t~l~ r~rq~~re, ~Je r r~s~t ~rs~, ~r~~~t~»~~ c~~~~~ ~~;;Y f?~ off` ~ ~>~~~~l~l~[ rnf~+~s#rfa~it,ur~ ~~~a.t~f~lf~y eca~~1~ $ct~trrtfes w~t,fl~Ix ~y r~>;:~t181',~,jf3Ct7'Y~~i9O}"?t#~ . a~ftl s~rtRle~~~ for j~~f~,~1~ ~~l~t f~~~;~~ ~ t WHAT ABOUT INDUSTRIAL/COMMERCIAL DEVELOPMENTS--SHOPPING CENTERS, OFFICE BUILDINGS? Lyman: I think you have to make a distinction between the industrial/commercial uses that are primary, economic activities versus those that are secondary. The primary economic activities would be creating new jobs that would in turn require, just like the resort industry, additional housing and al I of the attendant infrastructure. Secondary economic activitieswould,byandlarge,providegoodsandservicesforpeople that would be on the Island, and the impacts would be less substantial. DO YOU MAKE THAT KIND OF DISTINCTION IN THE REZONING PROCESS FOR INDUSTRIAL/COMMERCIAL PROJECTS? Lyman: The General Plan makes the distinction in that the resort housing condition is also articulated elsewhere in the General Plan with respect to large industrial activities that create increased housing demands. The Countyhasimposedintwosituationsnon-resort housing conditions. Those two situations were the State's HOST [Hawaii Ocean Science & Technology] Park development in West Hawaii and the Shipman Industrial Park in east Hawaii. DID THOSE PROJECTS BUILD NEW HOUSING? Lyman: Well, the condition imposed on the State's HOST Park was that they provide housing or housing program support, and this condition is being satisfied by the State's participation in the [State Housing Finance & Development Corporation's] Kealakehe project. With respect to the Shipman Industrial Park, as part of the zoning condition there was a finding that the first phase would not produce a housing impact, but that the tenants of the first phase would have to be monitored to determine what, if any, impact would result from the second phase. WHAT ABOUT PURELY RESIDENTIAL PROJECTS: WHAT INFRASTRUCTURE OR HOUSING IMPACTS COULD ACCOMPANY THEM? 75 Lyman: These would include the infrastructure requirements needed to supportthe community, whether they lx± the need for road improvements, water, or flood control measures. WHAT ABOUT THE AFFORDABLE HOUSING IMPACTS OF RESIDENTIAL DEVELOPMENTS. DO YOU SEE ANY? Lyman: They have the same impacts as any other housing. However, there is philosophical question as to whether or not they should be assessed on a similar basis or whether they should be allowed to have the assessment waived. ON OAHU, WHEN THERE IS A STATE REDISTRICTING, THE LAND USE COMMISSION OFTEN IMPOSED A 10% AFFORDABLE HOUSING REQUIREMENT, AND HAS MOST RECENTLY BEEN IMPOSINGA50%OR60%REQUIREMENT. DOES THE LAND USE COMMISSION ALSO DO THIS W ITH RESIDENTIAL DEVELOPMENTS ON THE BIG ISLAND THATARE NOT PART OF A RESORT? Lyman: Over the years there have been changes in the State Land Use Commission's housing conditions. Resorts, such as Mauna Lanf that were approved over ten years ago, did not have the 10% provision, but in their most recent State land use boundary amendment, they have a 10% condition. At the time of this interview, Hawaii County has not had a State Land Use Commission petition involving the State's proposal for a higher housing imposition, although one is currently being reviewed and should be before the Land Use Commission before mid-May. IS THAT A PURELY RESIDENTIAL DEVELOPMENT? Lyman: It's primarily residential with some commercial. The application is for Kohala Ranch's Urban Center project, and we're discussing the condition with the applicant, the State and the County's housing office. WHAT PLANS DO YOU HAVE OR WHAT METHODS ARE YOU CONSIDERING TO PROVIDE FOR FUTURE INFRASTRUCTURE OR HOUSING NEEDS? I KNOW THAT YOU HAVE A DRAFT ORDINANCE. Lyman: The County has a draft of an ordinance prepared for the Housing and Community Development Office by Professor David Callies of the University of Hawaii Law School. The draft provides a legal structure, based on current case law nationally, for an impact fee ordinance. What it doesn't have presently is the formulas or the numbers for any impact fees. The next step in finalizing the ordinance is to do the necessary work to come up with the numbers. THE DRAFT ORDINANCE'STREATMENT OF THE IMPACT FEE FOR HOUSING IS SIMILAR TO ITS TREATMENT OF THE IMPACT FEE FOR, SAY, ROADS OR SEWERAGE. DO YOU SEE THIS AS A WAY TO GO OR DO YOU SEE BUSTING THOSE OUT? Lyman: Well that's the way it's presently stated. It will need to be reviewed through the appropriate legislative process to determine If that's the way to go. t~~ a Lof h, +.~`rr~",.~f,.,~II~fNfeti~fl f2C 1~'~'h[nln e.~lt~~ •T!l~r~ a~r~ re;St~ly Lyra ~It~ri~a##Ir~s, 7'l~ej~'re 8ith~C.~B&&ed or #hsy r~~~Ge #h~l pra#"l# r~argf tt~ f at~a reaogn#~ #halt they aa~'# b+~ sty ar?~t'attassta+da~p~n#t+e~rt~~#~li~~~r~r~t~rett~ df~velap." 76 HOUSING AFFORDABILITY IS EVERYBODY'S CONCERN. ARE YOU CONCERNED THAT THE COST OF IMPACT FEES OR HOUSING EXACTIONS IS PASSED ON TO HOUSING CONSUMERS? Lyman: From a philosophical standpoint I share that concern. There are really two alternatives. They're either passed on, or they reduce the profit margin. I also recognize that they can't be so onerous as to dampen the private incentive to develop. WITH RESPECT TO THE RESORT PROJECTS THAT HAVE HAD HOUSING CONDITIONS ATTACHED TO THEM, WHO DO YOU THINK ENDS UP PAYING FOR THEM? WHERE DO YOU THINK THAT COST GOES? Lyman: I feel that these costs are borne by the resort developer and the consumers of the resort's other projects, be it condominium units, single-family units or hotel units. I feel that in the short-run it reduces cash flow from a developer's perspective because he's paying several million dollars for a housing condition that's going to lead to an opportunity cost, and in the long-run there Is an effort to recover those changes in the cash flow. b~td~fi,. ~~l~I~ >~15~>E 2ltp. CCISx IR~QifJ>~E~ ~3~lt ~It3i~"!'f~ 15y trhs parties t~l~t are cr~saNn~ ~h~s rr$ gar thoS~ +~c~sE:s. :Ttl'e rf$msn~'!~ for : ;vt#lil~ trtir~;str~ct~rre arf#Qrdaibfa Itasitlg Lt9lr~ipjr3t#i8t"1~ ~In' the, Et/j~ #IS1sr1d flea ' gut&#r~ppiE;«d thlg fJ~trntj~'s IFis~~t ~IlbiJf~~+ to pardfrda #t. ` ` WHO DO YOU THINK SHOULD BEAR THE COST FOR INFRASTRUCTURE, DEVELOPMENT OR AFFORDABLE HOUSING DEVELOPMENT? Lyman: I think thatthe cost should be borne bythe parties thatare creating the need for those costs. The County's ability to provide both affordable housing and infrastructure is limited by its fiscal ability to pay. The demands for both infrastructure and affordable housing development on the Blg Island have outstripped the County's fiscal ability to provide it. WILL YOU BE GETTING SOME SUPPORT FROM THE STATE? Lyman: During Mayor Carpenter's administration, the County has sought increasedfunding and has had some success. DO YOU THINK THAT AFFORDABLE HOUSING NEEDS TO BE NEW HOUSING? Lyman: It doesn't necessarily have to be new housing, but there are limitations on the existing housing that can be usedfor affordable housing. On all islands there have been renovations of plantation housing. HOW DOES FILTERING WORK, IF AT ALL, IN THE BIG ISLAND HOUSING MARKET? Lyman: The filtering down of a new unit being developed for the upper end or mid-range of the market? I think it has a relatively limited effectiveness in that much of the upper- and mid-level market housing is being consumed by people who are coming from off-island, so it's not necessarily leading to someone who's already on-island vacating amiddle-income house. 77 SO YOU DON'T HAVE A LOT OF MOVE-UP HOUSING? Lyman: There is, I'd say, a much more limited amount of that than there might be on Oahu. DO YOU THINK THAT ANY IMPACT FEE SYSTEM OR HOUSING LINKAGE PROGRAM SHOULD APPLY TO ALL DEVELOPMENTS, REGARDLESS OF SIZE? '{~ti~/~I$;Ojk9~)ta"x$~rX}+r ~ ~8t~~{~'Q ~SS88S~>S1RtfilP~!'1~7~1tt^it.~,p~Sif1A,1~#~~#313jp?R~~#il~<8 ; t>•i~t~©~s~rint+l~et~fl~~~l~rt~~1Q;p~~l.~t~'r~C~;~ /f#1~`S ~3QSSI~JIP' it'3 ~`18VB ft OCrGX+t~', lf?C fl`fSt~l?Ci~, tlp,;tn X?W1T1Cf~ ~ #zvf/d#~g p+eXrn~t L?pj~t7S~d tQ gt~tt~»~~z~n~~~~~l~~c~u~l#,te~~#i~s:~g~~~~r~t . slt~l;j~lf~ #s jprr~ierrlt !Lyman: Let me answer that in two parts. Whether it needs to be applied to all development is a philosophical issue that is best addressed by the legislative body. Philosophically, (believe that the i assessment or impact fee should be paid on a basis that is not only as equitable as possible, but does not deter the development process. If it's possible to have it occur, for instance, upon pulling a building permit as opposed to getting a zoning approval, the building permit stage is preferred. The County of Hawaii I Administration has been examining not just the impact fee alternative, but other funding alternatives such as the use of improvement districts, capturing increased real propertytaxes from large projects and using them to float bonds that could then be used to develop infrastructure that would then be repaid through t impact fees. IS THAT TAX INCREMENT FINANCING? Lyman: No, It's atax earmarking program. For instance, the increased real property taxes from the Hyatt could be used to float a bond for $10 million, and these bonds proceeds could fund infrastructure improvements. The County could then recapture the bond money through either improvement district financing or through impact fees. We are looking, on an interim basis, at using developer agreements to move ahead with that. ' DOES THE BIG ISLAND HAVE A DEVELOPMENT AGREEMENT ORDINANCE? Lyman: We have one that has been under review and will be moving from the Planning Commission most likely in April. IF YOU HAD AN IMPACT FEE SYSTEM, WOULD STATE AND COUNTY PROJECTS BE SUBJECT TO IMPACT FEES, OR SIMPLY PRIVATE SECTOR PROJECTS? Lyman: Wel I, again that's a philosophical question that needs to be addressed by the legislative body just as the question of should small projects be they 2, 4, 5 lots be exempted, or should the affordable housing projects be exempted. The latter has already come up with a County Water Department's charges that apply to all housing. 78 AND SOAFFORDABLE, SUBSIDIZED HOUSING PROJECTS HAVE BEEN CHARGED FOR WATER DEVELOPMENT? Lyman: With few,rf any, exceptions, they have been charged. GIVEN THAT THE STATE AND COUNTIES ARE INVOLVED IN INFRASTRUCTURE AS WELL AS HOUSING, WHAT POSSIBILITIES DO YOU SEE FOR CONFLICT OR DUPLICATION? Lyman: I think there is a great likelihood of duplication. What the County of Hawaii Administration has been doing is to look for areas of cooperation and not to focus on the home rule turf issues. Basically, we have agreed that from time to time, we are not going to agree. HOW WILL THE BIG ISLAND'S GENERAL PLAN FOR WEST HAWAII WORK IN CONJUNCTION WITH THE OFFICE OF STATE PLANNING'S NEW WEST HAWAII REGIONAL PLAN? Lyman: That has yet to be seen in that the Office of State Planning's plan is still being formulated, while the County's revised General Plan has been developed now for approximately five years, three years of which I have been responsible for. The revised General Plan is now before the Council. I also have to point out that the County's General Plan has a time perspective of up to forty years, which is much longer than the planning perspective that the State has. Obviously there will be differences based on the longer timeframe that the County is looking at. WHAT IS THE STATE'S TIMEFRAME? Lyman: They are looking at a timeframe of approximately twenty years, which is the timeframe they are using for major infrastructure facility planning such as roads, harbors, airports and to some extent, schools, and ten years for State Land Use Commission decisions. WOULD THE OFFICE OF STATE PLANNING'S PLAN BE ADVISORY TO THE LAND USE COMMISSION? Lyman: Their plan would be an administrative plan, and inasmuch as the Office of State Planning is now charged with the responsibility of putting forth the State's position for the Land Use Commission, it would be used in Land Use Commission matters. SO ONE THRUST OF THE PLAN WOULD BE FOR FUTURE URBAN DESIGNATION PURPOSES? Lyman: Well, it would not only be for the petitions that they would be considering, but also for the boundary review that will be occurring in two years. The County Administration is starting to focus some attention tosub-area planning, with an initial sub-area between the Ke-aholeAirport and the Kailua Village area, which we are referring to as Kona A, and Kona B being from Kailua to roughly Ke-ahole Resort, and Kona C being the remaining portion of north and south Kona. YOU MENTIONED THATYOUARE LOOKING FOR POSSIBILITIESAND WAYS OF COOPERATING WITH THE STATE. WHAT WAYS HAVE YOU FOUND SO FAR, REGARDING COOPERATION? Lyman: Well, cooperation occurs on aperson-to-person basis starting at the very top with the Mayor and the Governor having established what I consider to be a sound working relationship; this also occurs at the department head level, and one step further down the ladder with the staff working with staff. 79 ~ prle thing fhA# f7B~<#$ #p b;~ CQJt~r~tiCfi¢t~f Is tt1~# the ~;tlTjt?~&[rl lll~~ !'S Qrf~l4 t<h~ ~'jt?A~'1~1J #f~i~/s #l18! t~re'r~!i>t3u~Jr~~ 81# 'Tla~'~'iAtt;ft#y h~1i at~cs b~t~~t det+elpping ~ rr~nr~ ~t?;~t#r61##i3l~s#'~ ap;arp~l~ to #tn~frr~fng;;'~tlra~r~r~+~it~rr ~ ; r~+~g~i~~t~rr~l~~~l~'mpr~~f~`~~ret,~~tkrsr~~l~~t ' natas~~r~#~rn~~,~~~tfr~lxtrut3~u~~~t>~~+~~~I~ uni'e~s ttlr~re arf3 ~f~eq~~#~ ft~rl~~#f~ " ' WHAT EFFECT WILL THIS STATE-COUNTY COOPERATION HAVE ON THE PRIVATE SECTOR? Lyman: Take the most direct impact like the matters that go before the State Land Use Commission, under review by both the State and the County. We have met with the State to review our respective positions to see what similarities or dissimilarities there might be. IS THERE ANYTHING MORE YOU WOULD LIKE TO ADD BEFORE WE CONCLUDE? Lyman: Well, one thing that needs to be reiterated is that the impact fee is one of the financing tools that we're looking at. The County has also been developing a more comprehensive approach to financing infrastructure, and one of the things that I have been told by a private attorney who has been working on impact fee development matters for several years is that the Hawaii County approach is distinguished by being a more comprehensive approach. We recognize that an impact fee requirement will not assure timely infrastructure development unless there are adequate funds. YOU MENTIONED EARMARKING AS ONE OF THE TOOLS: WHAT OTHER KINDS OF TOOLSARE YOU LOOKING FOR? ' Lyman: Simplification of the improvement district process, which would in all likelihood require changes to the State statutes. WILLYOU BE MAKINGA DETERMINATION ON A GEOGRAPHICALBASISABOUT WHAT SETS OF TOOLS TO USE, OR WOULD IT BE ON A MORE PROJECT SPECIFIC BASIS? Lyman: We believe that through developer agreements it can be done on a district basis, working with specific projects. Part of the emphasis that we are beginning to give to sub-area planning is to accommodate that. We are also very clear that the formal planning process, whether it be at a General Plan level or at the rezoning level, is a very time-consuming process. THIS SOUNDS VERY MUCH LIKE WHAT THE STATE PLAN ENVISIONED. THAT DEVELOPMENT WOULD BE IN AREAS, AS OPPOSED TO STRETCHED ALONG THE HIGHWAY OF WEST HAWAII. IS THAT WHATYOU MEAN BY SUB-ZONING AND SUB-PLANNING AREAS? Lyman: Well, I mentioned the Kona sub-areas. The other sub-areas we are looking at are in the Waimea area and the area encompassing Kawaihae to Kohala Ranch, which also includes on considerable State lands. Those two areas can actually be linked up into one area that would encompass Waimea and Kawaihae to the Kohala Ranch area. 80 . TQWI; SH1CaEMpTO This interview with Tom Shigemoto, Director of the Kauai County Planning Department was held on March 7, 1988. IN TERMS OF KAUAI, WHAT DO YOU SEE AS THE CURRENT AND POSSIBLY FUTURE INFRASTRUCTURE NEEDS? Shigemoto: Let's start with our sewage system. We need to develop plans that Include implementation mesures, for our sewer systems for all of our communities. Right now, we only have sewer systems for Lihue, Wailua, Hanapepe and Waimea. Andwe have basically six different planning areas. Princeville has its own [sewage treatment system and in Poipu, they have one small sub-regional privately owned plant run by Kiahuna. So we need to upgrade and prepare plans for sewage systems on Kauai. That's definitely lacking. Our roadways need to be studied and Improved. Our inadequate roadway systems lead to a lot of problems tha we are encountering right now. We're behind in that aspect. WHAT KINDS OF PROBLEMS? Shigemoto: Not enough bypass roads or major arterials in and around Lihue, for example. Lihue is just one problem area. The roadways are narrow and at certain other locations to the east, Kuhio Highway in the vicinity of Coco Palms Hotel, for example, a traffic signal causes traffic to back up, which is compounded by the two-lane Wailua Bridge that does not allow traffic to get around this stoplight. Too many feeder roads into the main thoroughfares always clog traffic, but I guess that's historically been the ways streets and roadways have been planned, designed and built. ISTHEADEQUACYOF ROADSAND SEWERSEVERANISSUE INAPPROVING ORDISAPPROVING A DEVELOPMENT PROPOSAL? Shigemoto: In certain instances it could be. To date, I don't think we've ever denied any project because a roadway wasn't up to standard; in a lot of cases what we require developers and/or subeividers to do is to actual ly do the widening fronting their property or dedicating land to make provisions for a wider right- of-way. Interior roadway circulation improvements are provided by private developers. WHAT DO YOU SEE AS THE CURRENT AND FUTURE HOUSING NEEDS ON THE ISLAND? Shigemoto: Right now, there is a tremendous shortage of housing units, and at the slow pace that units are being developed, there will be tremendous demand in the future. DO YOU HAVE ANY IDEA OF THE NUMBER OF UNITS WE'RE TALKING ABOUT? Shigemoto: Unfortunately, 1 don't. If you need that information, our Housing Administrator has that. WHO'S CURRENTLY DOING THE BULK OF THE BUILDINGAND PAYING FOR INFRASTRUCTURE AND HOUSING? Shigemoto: As far as the roadways go, it's mainly the State highways. For County roadways, more maintenance,ratherthandevelopingandbuildingnewroadways,occurs. Wehaven'thadamajorCounty sewer project for a long, long time. 81 n "ttssart~~an#~ra~ethE~tn#3~~~f#~~fti~t++~Yir~g. Ir my ci~nf~lr~_ j wfl~rr~~er ~t :It~`~i<;;;~ta #IGlltx tae tak8 1tk96 ta! th~3 #c1t~1 ilt;#ri~~~ I~~ hQlet rv~rr?s_ "~fiartfs,~ptrrlt~~fst~r~rst;Rr~~tr~ra~~nt~sr~tf $;g@)t?, tNlteth8t' t?{t8t f$ @1tii3~~Xl t?!' t C~'{ iI redly filr sure. .Thy r~~~ft~n~ ;xe 8tfirat' payan~aftg~z~ra~tu~?tpr~l~rd';I~~th~hr~crsin~ uni#s aigtt~ a;~ # ,SAt~; 1 ~t~11!B+t#~t s~~ltt n~7~2 ~~fr~in~t pr~rj~rtri yet, ~~tt'e Icy 'a ~axef ~~Iti~llo~t~r.". THOSE ARE ALL DEVELOPER-SUPPLIED? Shigemoto: Mostly developers, right. So to generally answer your question, it's primarily private development. PRIVATE SECTOR HOUSING ALSO? Shigemoto: Housing also. THNIKING OF VARIOUS CLASSES OF DEVELOPMENT, LIKE RESORTS: WHAT KINDS OF INFRASTRUCTURE NEEDS AND HOUSING NEEDS DO YOU SEE ASSOCIATED WITH NEW RESORT DEVELOPMENT? Shigemoto: Okay, first, housing. Resorts generate the most need for housing, in my opinion. I don't know how to equate what we need in terms of housing versus the amount of employees that are generated, but I'd say thatwe need housing most whenever new resorts or hotels are constructed. Whatwe use right now is, whenever a hotel gets built, we take 10% of the total number of hotel rooms. That is your housing requirement, and again, whether that is enough or not, I can't really say for sure. HOW IS THAT WORKING? Shigemoto: Well, we haven't been getting the houses, so I can't say it's working either. We've been assessing people, but the units haven't been built. See what happens a lot of times is the developer is given an option of paying a fee. We don't establish the fee, the County Council does. The options are either paying a fee or actually providingthe housing units and, as I said, I haven't seen one housing project yet, done by a hotel developer. WHAT ABOUT IN TERMS OF CHARGE FOR INFRASTRUCTURE, ROADS, SEWERS? Shigemoto: Yes, 1 would say because they do create impacts to our public roadway systems. Again, , most of our roadways are adequat to supposedly handle the traffic. We have to make improvements to certain intersections and widen certain streets within the area being impacted, but I don't know how we can gauge what the needs of infrastructure would be. WHAT ABOUT INDUSTRIAL OR COMMERCIAL DEVELOPMENT: DO YOU SEE ANY HOUSING IMPACT NEED THERE OR ANY INFRASTRUCTURE IMPACTS? Shigemoto: i believe so and we have made a statement like that more recentlywith the Grove Farm Land Development Company application. They recently applied for, in succession, a commercial rezoning of 54 acres and an industrial rezoning of 60 acres, and we felt that these zoning changes ultimately will increase the need for housing because we know more employees are coming into the area. The problem is that h istorical ly we have never assessed housin g for these types of zoni ng changes, and for what reason 82 . St~rc~d ~u+~s~#r~ t~#~y wa ass~s~t r~si~~~it#~? prrt~'~~ts t~c~u~s#tt~ r~sc~u#re!m~nts,~ar+~ ~harr.fflr Ind'~str#~#a~+tl a~mrrterc#$t rez~sl~~ng~, ~bl~Frr~ #s +;ra~#d fir a~tv1'h#r>!g #S rQgr~#r~rz?i, ISQ eft juf;t dt36.S117't 8e~tn #p#jJ~,4/ tCi tf~A_' I really can't say. I started to question why we assess residential projects housing requirements, and then for industrial and commercial rezonings, nothing is said or nothing is required, so it just doesn't seem logical tome. So that's why we made some statements about the need to look at these zoning changes that are creating housing needs. Another problem is that we don't have a handle on how to determine how many housing units are needed for this type of zoning change. ARE THERE ANY SPECIAL INFRASTRUCTURE REQUIREMENTS FOR COMMERCIAL OR INDUSTRIAL? Shigemoto: On-site, they [the developers] prettywell take care of those things. Off-site, there is a definite need to improve the circulation systems and not necessarily only abutting the proposed development site, but regionally as well. YOU MENTIONED THAT YOU ASSESS A HOUSING REQUIREMENT ON RESIDENTIAL DEVELOPMENTS. DO YOU INCREASE THE ASSESSMENT? DO YOU DO ONE AT ZONING SEPARATELY FROM THE LAND USE COMMISSION OR DO YOU JUST PICK UP THE LUC'S REQUIREMENT? Shigemoto: Because we are party to the proceedings at the Land Use Commission, we kind of pick up on it. If we don't feet that's enough, we have the authority to increase it. But in most cases we wouldn't do that. WHAT DO YOU SEE AS THE RATIONALE FOR REQUIRING RESIDENTIAL DEVELOPMENTS TO PROVIDE A SEGMENT OF AFFORDABLE HOUSING? Shigemoto: That's a good question. This goes before my time, but I guess the rationale has been that since they're developing housing anyway, why not provide some additional units, or just provide some units of the total inventory for lower or affordable housing, and somehow defer the cost or spread the cost among the other units. on the neetl for;~n imnacttee QWlnance: " ~ . # #ktF~# ~~'19r8 bas to be ~ way iF£~ ~a~r~ ~r~f~it~lb#~ ~l~~~ss tlBVB/C1~X~bIrI#,~r. !'!{?iM~, r#1H l1'l8f43r I~n~vwn~fs,~r~ ~88t#~~ the brtr~! tYf ~1l df the bflu5rlg 1i86rdS, #n~'r~lstructt,re nt~f3tls #ar ttl'e Cflt[nty...SO~ng k#rtl ttf system nrfar~tula #tas lfl bt3 tl@Y@#f3#lEtl, 8~?tl 1 f13~# th~T ~t3lrlt# #t#1dt~ ril ; t~rtllnan~e sha>u#tl be etlt~pte~tl antl tlBVEI U f~8tl. 83 ARE THERE ANY PLANS RIGHT NOW FOR NEW WAYS OF PROVIDING INFRASTRUCTURE OR AFFORDABLE HOUSINGATTHECOUNTYLEVEL? ARE YOU CONSIDERINGANYTHINGLIKEAN IMPACT FEE ORDINANCE SUCH AS THE BIG ISLAND'S? Shigemoto: I feel that such an ordinance needs to be developed. Right now, It may be In the back of the County Council's minds and it is definitely in the back of my mind to have such an ordinance passed, and the reason I say this is because 1 feel there has to be a way to more equitably assess developments. Right now, the major landowners are bearing the brunt of all of the housing needs, infrastructure needs for the County. And again, they don't necessarily object to paying these assessments for impact fees if it's assessed equally--even down to the two-or three-lot owner, in the case of a subdivision, or a guy who comes in for one-acre commercial developments. Some kind of system or formula has to be developed, and I feel that some kind of ordinance should be adopted and developed. DO YOU HAVE ANY NEW PLANS FOR DOING AFFORDABLE HOUSING? ANY HOUSING DEVELOPMENT CONCEPTS? Shigemoto: Again, most of this is handled by our Housing Administrator, but there is one experimental project that we tried called "Self-Help." That's in Kilauea where they hired an administrator to go around the job and see what might result in lowered cost. Other than that, I don't think anything innovative has been developed. THERE HASBEENALOT OFTALKAND CONCERN EXPRESSEDABOUTAFFORDABLE HOUSING. ARE YOU CONCERNED THAT THE COST OF IMPACT FEES OR AFFORDABLE HOUSING EXACTIONS WILL BE PASSED ON TO THE CONSUMERS? Shigemoto: There is no doubt in my mind. THAT THEY WILL BE? Shigemoto: Yes. And that's been a problem when you try to get affordable housing. And yet, you know the kinds of impacts and needs that housing in general createsfor some types of parks and different kinds of services. Somehow you have to assess these and it's unfortunate, but the developer won't eat that cost. ~D~.;, 'r ~1S't'~Bi'B that t11Bxa shLaWfgi bw~ ly7#~!" ct7~i'-shaxix~g_ Jn ot!?~r wt~r(~J4> # d~av~?ppa:~' takes ~ Eesser pr©fPt, ft That e~~~ be ~rrai7ged, an~'1 the consumer sh~ttld p+~Yj S;;i~~l,'bttt It~~ more ~ S~!flt€tirtg r~# thi3 l7tal res~o»f~f#rlltty." WHO DO YOU THINK SHOULD BEAR THE COST? Shigemoto: I believe that there should be more cost-sharing. In other words, a developer takes a lesser profit, if that can be arranged, and the consumer should pay some, but it's more a splitting of the total responsibility. DO YOU FEEL THAT, IF YOU HAD AN IMPACT FEE SYSTEM, IT SHOULD APPLY 70 SMALL DEVELOPMENTS, AS WELL AS LARGE DEVELOPMENTS? Shigemoto: Yes. GIVEN THAT THE STATE AND THE COUNTIES ARE BOTH VERY ACTIVE IN INFRASTRUCTURE PROVISION AND AFFORDABLE HOUSING, WHAT POSSIBILITIES DO YOU SEE FOR CONFLICT AND DUPLICATION BETWEEN THE TWO? 84 Shigemoto: There is always that possibility of conflict and it's unknown. In terms of roadway systems, I think the area of responsibility is pretty well defined. For example, we know the responsibility that State highways has versus what the County has. Of course, when it comes to a County road meeting a State highway, there is some overlapping in that instance. In terms of sewage treatment, it's primarily County responsibility, with some interaction with the Health Department, of course. But as far as planning and constructing the sewer lines, that't all County. In the park system, there is a clear definition between the State parks and County parks, and I think there are some bills to clarify overlapping jurisdictions, even to the extent of land exchange. Airports are purely State. Hospital services would also be primarily State. WHAT ABOUT HOUSING? Shigemoto: Because we now have a County housing office, I fee there's a lot more coordination and cooperation between State and County agencies. The County a lot of times applies for funding through the State. The State HFDC (Housing Finance & Development Corporation jwants to doprojects--they have one in Hanamaulu and another in Puhi, so it's pretty well coordinated, I feel. DO YOU SEE ANY STREAMLINING OR COOPERATION WITH THE STATE IN ANY AREAS? Shigemoto: Yes. I don't know if it's more with this Administration or not, but I see a lot more effort put into coordination with the State agencies in terms of housing, and in terms of our relationships with the Planning Office and Department of Transportation. They make theefforttocomedownandtalkwhenever problems occur. I sit on the CZM [Coastal Zone Management] StatewideAdvisory Committee on shoreline management regulations, and one positive thing that has come up from this program is a permit simplification process whereby, if State and County permits are involved, an applicant can apply through the State and get directed to the necessary agencies to get the permit with faster service. There is a lot better coordination and I see that it will get a lot better. DO YOU THINK THE ROLES ARE FAIRLY WELL DEFINED RIGHT NOW BETWEEN COUNTY AND STATE IN THE PROVISION OF INFRASTRUCTURE OR ARE THERE SOME OVERLAPPING AREAS THAT NEED FURTHER REFINEMENT? Shigemoto: It think it's pretty well defined. Of course, I know there are some problem areas. But I think i for the most part, it's okay for now. WHAT DO YOU THINK THE PRIVATE DEVELOPER'S ROLE SHOULD BE IN INFRASTRUCTURE PROVISION AND AFFORDABLE HOUSING CONSTRUCTION? Shigemoto: I personally feel that the private developer should provide the housing for the impacts they create. If there were a lot of State and County monies, then that wouldn't be too bad 'rf they just provided land for the State and County to use. h' Y f r ~ kne3rw t~l8 GQUI'f~y CI~Cf6?Sr~f't1J>~1+'~ fh{? ~7pt~l~,>[rr sr~t7I dt3fl!'tktliE~f+Y/iL3~titfNell the,~t:~u~t~~'sd~~n~~I,~i~r,~S'tfta~t ~#7~s4x bu# S3f'tCt3 !`tl?tE9S &?'@ lacking 1t)~' t?#8 ~'t~it~~IlD;~i fjEt+fE19S 6t lQt;'lt~r'fger, $Gf l' feel tt?t! devl~lp~3f9t' lYl~iQt~[gl'"#I!3 i prlptrldlf~tg ##!8 neces;a+~r~r l+©t1$IJ'~g t1#~>~#$. IJQ; i~~'1~75; f3~ lntraS~rfyt:turQ,.. jd~velapers ~hQetlpt~ ~t te~~€ R$Y fQr tlte~~' pry ret~l 5ll~if'e Bart: the ~r»~ferr#s t;~l~lt l~~t~+r~ ~t~et;k rrr~l~iieU_" 85 YOU'RE SPEAKING ABOUT RESORT AND COMMERCIAL USES? Shigemoto: Resort, commercial, even residential for that matter. It's just that I know the County doesn't have the money, and I don't know how well the State is doing as far as that goes, but since funds are lacking for the housing, it takes a lot longer. So I feel the developer should be providing the necessary housing units. In terms of infrastructure, if not provide infrastrucutre to service their development, at least pay for their pro rata share of the impacts that have been created. Again, I get back to the need to develop some kind of standards so that they know what they are up against, and they know what the rules are. I feel that they should be paying some fair share anyway. DO YOU SEE KAUAI MOVING MORE TOWARDS REQUIREMENTS TO ACTUALLY CONSTRUCT THE HOUSING UNITS? YOU MENTIONED EARLIERTHATTHERE WASAN IN LIEU PAYMENTAND YOU HAD NOT SEEN ANY NEW HOUSES BUILT. DO YOU THINK THERE WILL BE MORE OF A MOVE TO BUILD HOUSING? Shigemoto: I think so. That's on everybody's mind and that seems to be the primary focus, the need for housing. Everybody says we need housing and everybody goes to the County Council and testifies that we've been saying we need housing for the past five years, and we haven't seen housing. We have small projects here and there, 1 S units, 13 units but when you are talking of a need for 2,000 units, where is it coming from? I think there are conditions in zonng and different kinds of land use changes that will start to tighten up, and I think we will be getting more units built. WILL YOU BE MAKING ANY DIFFERENT RECOMMENDATIONS THAN YOU HAVE BEEN IN THE PAST? Shigemoto: As far as building houses, I plan to work with the Housing Adminsitrator's office to find out if we can achieve the units. I would like to see more units built yes, and I plan to impose such conditions, although I don't knowwhat the political ramifications might be. It is always sensitive. It's hard, butwe have to start somewhere. YOU MENTIONED EARLIER THAT KAUAI CURRENTLY HAS AN ENVIRONMENTAL IMPACT FEE ORDINANCE. WHAT EXACTLY DOES THAT DO? Shigemoto: It assessesafeeforthedifferenttypesofdevelopmentthatoccur. Forexample,'rfit'samulti- family or ahotel project, the fee is $1,000 per unit. For a residential subdivision, it's basically $500 per lot. For a commercial development, it's based on $100 per minimum parking stall required. For an indusVial development, it is based on $0.25 per squarefoot of the gross building area, and also that $100 per square foot for offices or any retail space that might be industrial classes. WHAT DOES THE COUNTY DO WITH THE FEE? Shigemoto: It goes into a special trustfund to be used strictly for capital improvements islandwide. It's not earmarked for justthe district from which the funds come, and it's used for roadway, drainage, sewers and public facilties. SO YOU HAVE THE BEGINNINGS OF AN IMPACT FEE SYSTEM DONE ALREADY? Shigemoto: Yes. And as I said, I would hope thatsomebody initiates an ordinancefor housing exactions, highways and sewerage. the Water Department issemi-autonomous, so they pretty much take care of their own needs. Just as long as everybody knows what the rules of the game are. It'll make my job that much easier because a lot of conditions that we impose comefrom here. There is nothing established from past practice, and so I would like to start assessing for an industrial or commercial project and to have a handle on how many units are required. I would be able to specify what was required instead of guessing whether a housing exaction would be placed on the development. It's really difficult to be in a situation like that. Some people may want it without any set rules, some may want it more flexible, but I find it easier and a lot cleaner to have the rules set up. 86 CHAPTER 3 Impact Fees and Housing Exactions Programs: A Legal Analysis by Benjamin A. Kudo ABSTRACT This chapter closelyexamines the legal framework inwhich impactfee programs have been developed and put to use by local governments. Included also is a discussion of the relevant benefits and limitations of impact fee programs and the experience encountered by other jurisdictions. We begin this chapter by an examination of the power of local governments to regulate. Central to any local government's ability to enact laws and to regulate its residents is the authority granted to it under state law. Generally, the constitution of each State promulgates to its political subdivisions specific authority and responsibility to carry out certain governmental functions. I n some states, including Hawaii, "home rule" provisions contained within the State Constitution grant autonomy to county governments to carry out certain responsibilities in a manner they deem appropriate. This includes the enactment of impact fee laws. Typical community needs likewater and sewer service are generally required of the developer at the zoning or subdivision approval stage. Fees collected for water and sewer connections are a common part of the land use regulation process. Over the last decade or more, the growth of communities and the resulting demands for public services i.e., parks, police and fire stations and schools, etc., have placed additional burdens on the fiscal resources of localgovernmentstorespondtosuchgrowth. New sourcesoffundshadtobefoundquickiytoalleviate these community pressures or new development could not proceed. Elected officials sensitive to economic and political pressures first looked to some traditional means of financing used by local governments to construct capital improvements such as debt financing through the issuance of bonds, special assessments and the use of taxing authority. All of which have limitations. Bondfinancing, an attractive option used to raise monies for capital improvements increases the debt level 87 of local government and is susceptible to market factors making it unattractive in certain situations. Special assessments, also a common means of financing capital improvements passes the cost of developing public infrastructure directly to the homeowner-consumer through an assessment levy. The greatest source of funds which local governments receive is through their taxing authority. Raising taxes, however, a politician's nightmare, is clearly a choice of last resort. Through the development process, developers are asked and in most cases required to provide various forms of community improvements as conditions to permit and zoning approvals. This process, called ad hoc exactions, has in most jurisdictions, resulted in a lack of consistency, predictability and fairness to those who are made subject to it. Through this process, small developers generally have fewer exactions imposed upon them than the larger developers. The early developments vis a vis those developments occurring in a mature area also receive different treatment. During the early 1970's, state and county governments turned to comprehensive land use flans to accommodate and manage growth. Capital improvement plans were also made a part of the comprehensive land use plan. These plans were an attempt to merge growth rate and direction with the county's ability to provide public infrastructure. The plans pre-approved development in certain areas of the city designated for growth. As a result, pressure from the private sector and the market place to develop lands increased and local government util izing the ad hoc exaction process could not keep up with the needed infrastructure improvements required by the new development. The ad hoc nature of the exaction process lent itself to inconsistent application and, therefore, in some cases unfair treatment. As developers applied for permits and construction of residential and commercial projects proceeded, the demand for infrastructure and community services also increased at an accelerated rate. Local governments found it difficult, if not impossible, to keep up with the growth related impacts. As a consequence, a source of revenues to fund needed capital improvements was found in charging each developer with a pro rata share of the cost necessary to provide the needed public infrastructure. Fees have always been used by local governments to operate and maintain public facilities and services. These are generally referred to as "user tees". As a natural consequence, fees were also looked at to provide monies to fund not only operation and maintenance functions, but also to build or construct the facility. Alas, impactfees. The conceptwas relatively simple. If a development activity created a need for community services or facilities, fees should be assessed against it in an amount that could provide for establishing or constructing such services or facilities. If each developer, large or small, were charged an allocated share of such costs this would go far toward alleviating the inconsistency and unfairness associated with the ad hoc exaction process. The following chapter suggests, from a legal perspective, the major elements an impact fee ordinance should contain. Impact fees can provide predictability and equality of treatment by setting forth within its framework the amount one must payfor different types of development, as well as, the basis of how such fee is determined. The private and public sectors have begun to move toward greater participation by the private sector to provide for an expanding range of community benefits. However, there is a limit to this participation. As a legal requirement, the methods used to exact concessions must be reasonably connected to the impacts created bythe new development activity. If they are not, the exaction is illegal. Impactfees implementthis legal standard by drawing a correlation between the impact caused by development activity and the fees necessary to mitigate against such impacts. As discussed in this chapter, it is much less clear whether inclusionary housing and linkage programs meet the necessary legal standard of the exactions being reasonably connected to the impact. 88 The balance between economic development and our quality of life will become more difficult to maintain as pressures to urbanize our communities increase. Our comprehensive land use plans have identified the goals and objectives for growth in our community. These plans have, on the other hand, placed additional burdens on our local governments to provide public services and facilities to keep up with targeted growth. Hopefully, impactfeeswill assist in maintaining the delicate balance, between our social and economic goals through a system of allocating responsibility. 89 IMPACT FEES I. INTRODUCTION Growth of communities on a local and national level has presented difficult problems to local governments which are faced with the responsibility of responding to the impacts of growth in terms of increasing demands for public services and facilities. The need for additional housing and infrastructure has placed tremendous strain on the resources of local governments to finance such community-wide needs. Planners, governmental officials, and legislators have sought to resolve this problem by having new development pay its own way. This has been accomplished, in part, through the imposition of impactfees. Traditionally, local governments have provided needed public services and facilities through property taxes. More recently these same services are provided on an ad hoc basis through negotiation with the developers. Theresultofthismethodisthatcontributlonsarenotmadeuniformlyorconsistently,resulting in heavier exactions being imposed on the developer who comes in at the tail end of an already developed area. Impact fees have been viewed by some jurisdictions as a solution to bringing needed funds to support growth in an area as well as parity to the development process. The imposition of such exactions and now, impactfees, by local government raises numerous legal issues. Although no Hawaii court has addressed these issues, state courts across the nation have developed a substantial body of case law which has resulted in guidelines for local governments to follow in adopting such growth programs. The following chapter discusses some of the legal issues which arise when local governments impose development exactions or impact fees on new development. II. ABILITY OF LOCAL GOVERNMENT TO IMPLEMENT GROWTH MANAGEMENT POLICIES AND PROGRAMS A. Local Government Power to Regulate The ability of a local government to regu late develop ment through the imposition of exactions or conditions is dependent upon the source and extent of, the local government's power to regulate. The following discussion explores the source of local governments' power to regulate, how this power interrelateswith that of the state government, and the limitations placed on that power. Under the United States Constitution, the states reserve all powers not specifically granted to the federal government under the Constitution.' One of the major powers reserved to the states is the inherent power of the state to enact laws regulating or prohibiting anything which is harmful to the welfare of the people.z Another important power of the states is the ability to impose taxes.3 The power to regulate is commonly referred to as the state's "police power." Under its "police power", a state has the authority to regulate and act to protect the health, safety, welfare or morals of the persons within their jurisdictional boundaries.° A state's exercise of its police powers is constrained only to the extent that the state acts in conflict with one of the powers reserved to the federal government, or when the state's exercise of its police powers violates the United States or state constitutions. Local governments, in contrast, have no inherent police power.5 A local government can only regulate to the extentthat it has specifically or impliedly been granted a delegation of power from the state.6 This rule applies equally to cities, towns and counties. One way in which the police power is delegated to local government is through enabling legislation. An example of such legislation is found in the zoning enabl ing acts of various states, most of which are derived 90 from and patterned after the Standard Zoning E nabl ing Act. ~ Th is Act authorizes municipalities to regulate the height, size, location and use of buildings, and to regulate and restrict construction, alteration or use of buildings. It further sets forth the purposes for which land use regulations may be enacted.° Such enabling statutes have permitted municipalities to regulate the use of land within their boundaries. Another source of local government power to regulate is through the grant of constitutional home rule authority. "Homerule"isaconceptunderwhichalocalgovernmentisgrantedauthoritytoactandregulate matters of local concern within its boundaries.e One of the enumerated objectives of county home rule is to reduce the ability of the state legislature to interfere in "county," "local," or "municipal" matters.70 Whether land use controls fal I within constitutional home rule powers depends to some degree on the type of home rule provision the state constitution contains." Under traditional home rule, the constitution generally specifies an area or areas of responsibility in which local governments can legislate without statutory authority. For example, a traditional home rule provision might authorize the local government to legislate regarding its "municipal" or "corporate" affairs.72 An example of a traditional home rule constitutional provision is contained within the Florida constitution, which provides that municipal corporations have "governmental, corporate and proprietary powers" and "may exercise any power for municipal purposes, except as otherwise provided by law".73 Under traditional home rule authority, courts classify areas of legislation as being exclusively local, exclusively belonging to the state, or of concern to both. If the subject is of local concern, the municipality may legislate, and the state may not preempt the local legislation. If the subject is one of state concern, the local government may not regulate at all. If the subject is of shared local and state concern, the local government may regulate, but state legislation may preempt the local legislation. Home rule casesarising in traditional home rule states have generally construed land use regulations as a matter of shared state and local concern." Some states have adopted a more modern form of constitutional home rule, under which local governments mayexercise all powers the state legislature is capable of delegating to them,whether or not such delegation has been made. This type of home rule is clearly considered to confer authority to regulate in the land use area.75 The adoption of a charter generally provides the means bywhich local government receives its home rule power.76 A county home rule charter is generally considered to be the county's "fundamental organic law"." The county's charter establishes matters over which it may regulate, and in some states may act as a limitation on the grant of home rule power.7e It should be noted that not all states adhere to home rule. "Dillon's rule', which restricts the authority of local governments to the powers conferred expressly or by necessary implication, still applies in some states.1e In these states, a local government would not have the requisite authority to regulate land use, or to enact an impact fee ordinance unless the state had granted the local government express power to do so or such regulation was necessarily implied from such an express grant of power. Finally, as discussed more fully below, the power of both the states and their local government subdivisions to regulate is limited to the extent that the exercise of those powers violates constitutional guarantees. B. Development of Growth Manaoement Policies and Proorams Utilized by Local Governments. 91 Over the years, local governments have used their police powers to control the use of land and the effects of growth in their community. The use of these powers has developed and expanded with interpretations by the courts as to what constitutes permissible use of the police power. The courts have recognized that the permissible scope of the police power changes with changing circumstances. The dynamic nature of the police power was described by the California Supreme Courtin Miller v. Board of Public Works of Citv of Los Angeles,20: In short, the police power, as such, is not confined within the narrow circumspection of precedents, resting upon past conditions which do not cover and control present day conditions obviously calling for revised regulations to promote the health. safety. morals. or general welfare of the public; that is to say, as a commonwealth develops politically, economically and socially, the police power likewise develops, within reason, to meet the changed and changing conditions. What was at one time regarded as an improper exercise of the police power may now, because of living conditions, be recognized as a legitimate exercise of that power In brief, there is nothing known to the law that keeps more in step with human progress than does the exercise of this power. (Emphasis added). The first legal controls over private development came with the adoption of zoning and subdivision regulations during the early part of the 20th century. These regulations gave the cities control over the type of development thatoccurred in particular locations and attempted to make new uses compatlblewith surrounding and existing land uses. The regulations could impose standards that were necessary to protect the health, safety, and general welfare of the community. These controls were justified under the legal doctrine of nuisance, under which cities used their police power to control adverse impacts upon adjacent properties and on the community in general.27 In the landmark case of Village of Euclid v. Ambler Realty Co.,22 the United States Supreme Court extended the ambit of police power to include zoning. The Court explained: The ordinance now under review, and all similar laws and regulations, must find their justification in some aspect of the police power, asserted for the public welfare. The line which in thisfield separates the legitimate from the illegitimate assumption of power is not capable of precise delimitation. It varies with circumstances and conditions. A regulatory zoning ordinance, which would be clearly valid as applied to the great cities, might be clearly Invalid as applied to rural communities.... Thus, the question whether the power exists toforbid the erection of a building of a particular kind or for a particular use, like the question whether a particular thing is a nuisance, is to be determined, not by an abstract consideration of the building or of the thing considered apart, but by considering it in connection with the circumstances and the locality. A nuisance may be merely the right thing in the wrong place-like a pig in the parlor instead of the barnyard. During the early stages of growth control, local governments viewed zoning and subdivision laws as providing a legal mechanism whereby certain land uses were permitted only in certain designated areas of the city. In order to prevent nuisances from occurring, cities would also require developers to provide on-site sewer lines, streets, and drainage facilities to mitigate adverse impacts on existing neighboring projects. Construction of off-site infrastructure such as sewage treatment plants and arterial roads was generally not required, since these improvements benefited more than one development. These off-site improvements were generally financed through taxes or user charges authorized under the local governments taxing or revenue powers granted to it by the State.za In the early 1970's, many cities could not afford to provide the extensive infrastructure needed by new developments. Keeping up with the pace of new developmentwas leading to higher taxes and utility rates 92 for existing residents. This led to a second stage of regulations (i.e. the "Planning Era")which focused on growth control and growth management. One method by which municipalities controlled growth during the Planning Era was to adopt capital improvement plans, and prohibit any development in an area which did not have the required infrastructure until the infrastructure had been constructed in accordance with the plan.Z' The leading case upholding such a plan was Golden v Planning Board of Town of Ramaoo.zs In Ramapo, the court upheld a program under which a schedule for construction of new infrastructure was established, and no developmentwould be allowed until the scheduledfacilities had been built. The court stated: The town has imposed temporary restrictions upon land use in residential areas while committing itself to a program of development. It has utilized its comprehensive plan to implement its timing controls and has coupled with these restriction provisions for low and moderate income housing on a large scale. Considered as a whole, it represents a reasonable attempt to provide for the sequential, orderly development of land in conjunction with the needs of the community, as well as individual parcels of land, while simultaneously obviatin~q the blighted aftermath which the initialfailure to provide needed facilities so often bring. ° Under such growth management programs, however, no effort was made to sh'ft the responsibility for financing the needed infrastructure to new development.' The present stage of growth control regulation began in the late 1970s and 198os, and involves the use of assessments, dedications, and development fees (referred to collectively as development exactions), which some authorities feel spread the cost of new development between current and future populations.28 Developers are now frequently required to provide off-site aswell as on-site infrastructure for their projects. Because on-site infrastructure is located within the development site, there is a strong presumption that these improvements directly benefit the residents of the project and m itigate against any negative impacts upon neighboring projects. Conversely, because off-site Improvements (such as parks, schools or arterial roads) generalty benefit both residents of the project and non-residents, the connection between the needs created by the development and the infrastructure requirement is sometimes less clear. The recent proliferation of impact fees and development exactions (especially off-site exactions) is due to several factors. One of the major factors is thatfederal funds to the states and local governments ,.vough revenue sharing and other grant programs has significantly decreased over the last few years. Another factor is the continuing migration of the population to the suburbs which has required local governments to extend public services to new and growing areas. In some cases, particularly in areas of high growth, it is difficult for local govern ments to keep pace with the demand for new services wh ile also operating and maintaining existing facilities.28 In addition to the above factors, traditional sources of financing, upon which local governments relied in the past to fund needed public services and facilities, have become more difficult to obtain. Local governments have traditionallyfinanced public services through general revenue and general obligation bonds that are pledged against real property tax collections. Recent changes in the bond market have made the marketing of debt instruments more difficult in some jurisdictions.30 In addition, existing residents have become reluctant to pay for public services required by new residential development through property taxes, or to have their property taxes increase without a commensurate increase in the level of public services.31 As a consequence of this reluctance of the existing residents to share in the cost of new developments, some local governments have developed a policythatwill allow new developmentonly if it can "pay itsown way". Thus. decision makers increasingly condition their approval to develop on the dedication of infrastructure or the payment of impact fees, which effectively shifts the burden of providing services and 93 facilities from the public sector to the private sector.3Z In response to these developing trends, communities across the country have searched for and presently use a variety of programs and policies to finance and control growth. These include a range of development (or subdivision) exactions, as well as impact fees. What are development exactions? They are requirements that developers "dedicate" land or facilities for public use, such as streets„parks, water and sewer lines, or pay a fee in lieu thereof to be used to purchase lands orfacilities.33 Exactions are generally limited to improvements constructed within the development area, which are required under the subdivision code. An impact fee, in comparison, is a charge levied against new developments in order to generate revenue for funding capital improvements or providing public services necessitated by that development.3' Impact fees can be, and often are, used for off-site as well as on-site improvements. Impact fees are usually regarded and accepted as a substitution for dedications or non-fee type exactions. The fees frequently take the form of a facility connection charge assessed on a per unit or square footage basis for each type of land use category. The fee is usually applied against new bu ildings, rather than anon-fee type exaction required from the developer.35 Because their applicability is not confined to the subdivision approval process, impact fees may be levied on other types of development, such as commercial and industrial projects.36 III. VALIDITY OF IMPACT FEES Development exactions and impact fees are vulnerable to legal challenge on several grounds. The following section is a discussion of the typical legal challenges made against development exactions, the case law development in this area, and the effect of the recent United States Supreme Court case, Nollan v. California Coastal Commission,37 on the ability of local government to assess development exactions. From these cases, we have drawn some guidelines which the drafter of a legally defensible impact fee ordinance should heed. While this article deals primarily with impact fees, the analysis of courts with respectto development exactions is the same. Therefore, the cases discussed below address challenges to both impact fees and other development exactions. A. Challenges to the County's Authoritkto Regulate. The threshold issue addressed bycourts confrontedwith challenges to development exactions and impact fees is whether local governments have the authority to impose such requirements upon the developer. There are two aspects to a court's evaluation of whether a local government is authorized to enact the measure or ordinance in question. First, the court will examine the nature of the exaction or impact fee ordinance, to determine whether the exaction is a regulation or a tax. Once the court has made this determination, itwill examine whether the local government has been authorized to either regulate for the purpose for which the exaction is imposed or to levy a tax. t . Nature of the Exaction or Impact Fee Ordinance. At the outset, an examination of an impact fee ordinance will consider whether the fee being assessed is really a tax, a regulatory measure, or something else (e.g. special assessment).38 In determining whether the measure is a regulation or a tax, the court will review the legislative intent in enacting the law and the operative effect of the law. If the purpose of the ordinance is primarily to raise revenues for financing the expansion of municipal facilities and services, the ordinance wil I be regarded as a tax. If, however, the fees are imposed to regulate development by requiring that adequate facilities and services are provided for new development, the measure will be regarded as regulation.3B In making this determination, courtswill review the nature of the improvements to be constructed from the 94 revenues collected. If the revenues are to be used to construct facilities which primarily benefit the residents or users of a new development, then the fee will be regarded as a regulation. This is frequently determined by examining whether or not the collected funds are segregated from general revenues and earmarked for specific type of improvements which will benefit the new development.~0 In Emerson Colle eg v City of Boston,01 the court discussed the difference between a regulatory fee and a tax. In that case, the city attempted to impose an augmented fire services charge on the owners of certain buildings for which fire-fighting costs were found to be greater than for the majority of structures in the city. The court explained that user and regulatory fees differed from taxes:~Z Such fees share common traits that distinguish them from taxes: they are charged in exchange for a particular governmental service which benefits the party paying the fee in a manner "not shared by other members of society", ...;they are paid by choice, in that the party paying the fee has the option of not utilizing the governmental service and thereby avoiding the charge, and the charges are collected not to raise revenues but to compensate the governmental entity providing the service for its expenses. (Citations omitted). The court further explained: "[T]hat revenue obtained from a particular charge is not used exclusively to meet expenses incurred in providing the service but is destined instead for a broader range of services or for a general fund, 'while not decisive, Is of weight in indicating that the charge is a tax'."'3 The court found that the augmented fire service charge was a tax, since the benefits of the augmented fire protection were not limited to the owners of the buildings paying the fee, and the revenue collected through the assessments was targeted for the general fire and services fund rather than the additional needs attributable to the buildings assessed. Similarly, in Longboat Key v. Lands End. Ltd.,~~ the court held that an ordinance requiring dedication of park land or payment of an in-lieu fee was invalid because the ordinance provided that the funds were to be used for parks or other "specified town purposes" required as capital Improvements. The in-lieu fee was considered a tax because there would be no guarantee that the funds would be used for park purposes.°5 If the measure is deemed to be a tax, the courts will then determine whether the county has been granted specific authority to impose such a tax. Typically, taxing authority is reserved to the states. However, states do grant specific taxing authority to the counties such as in the case of the counties real property taxing power. If the court determines that the state has not expressly and specifically granted the county the authority to impose such a tax, the fee will be invalid. 2. Authority to Regulate. If an ordinance sufficiently segregates and earmarks the funds so as to establish that the measure is clearly a regulation rather than a tax, the court will next examine whether the local government has the authority to regulate for the purpose forwhich the fee is imposed. This authority can be either express or implied. Courts have generally found authority to impose impact fees from the "home rule" powers granted to the county under the state constitution; specfflc state statutes empowering local governments to regulate in the areas of zoning or planning; subdivision laws governing specific areas such as water or sewer; or a state statute's general welfare clause.' The folbwing is a brief discussion of these areas. a. "Home Rule" Powers. Home rule power in several states has been held to confer authority upon local governments to require dedications, In lieu fee requirements, and impact fees. For example, the Illinois constitution grants municipalities home rule power, providing that "a home rule unit may exercise any power and perform any function pertaining to its government and affairs ..."'e In Krughoff v Citv of Naoervllle,08 the court held that a city ordinance requiring contribution of land or money in lieu of land for school and park sites as a condition to subdivision approval, which was adopted incident to the implementation of a comprehensive plan for adequate school and park sites, was 95 within the exercise of the municipalities home rule powers "pertaining to its government affairs". The Florida courts have interpreted the home rule powers of municipalities and counties broadly in holding that these governmental bodies are authorized to adopt impact fees. The Florida Constitution, Art. VIII, Sec. 2(b) provides that municipal corporations have "governmental, corporate and proprietary powers" and 'may exercise any power for municipal purposes, except as otherwise provided by law".50 In Contractors & Builders Association of Pinellas Countyv. Citysf Dunedin,s'the Florida Supreme Court held that this constitutional provision authorized the city to impose a water and sewer Impact fee. The court found that implicit in the power to provide municipal services is the power to construct, maintain and operate the necessary facilities. The Florida courts have also held that charter counties have the authority to provide impactfees under the home rule power granted to charter counties. The Florida constitution provides that "Counties operating under county charters shall have all powers of local self-government not inconsistent with general law . . .„sz In Hollywood v. Broward Countv,53 the court held that this provision authorized the county to adopt a park impact fee ordinance. The court noted that in the absence of preemptive state statutory or constitution law, the paramount law of a charter county is its charter.5° The county charter granted the county all powers of local self-government not inconsistent with general law. The court consequently found nothing in the charter to suggest a prohibition to the impactfee ordinance in question and therefore upheld its validity.as On the other hand, the grant of home rule power through constitutional provisions may be limited, resulting in a lack of authority to enact impact fees. For example, the Constitution for the State of Wyoming grants home rule power to its cities and towns. The Wyoming Constitution provides that its cities and towns are empowered to determine their local affairs and gsovernment, subject to statutes uniformly applicable to all cities and towns.68 In Coulter v. Cityof Rawlins, 'the Supreme Court of Wyoming examined the authority of a city to require water and sewer connection fees. The court held that the grant of home rule power had minimal impact upon the determination of whether the city had the authority to enact the ordinance in question, since a previous case had held that the levying of fees was an area of municipal power which remained subject to legislative control under the grant of home rule power.58 As discussed below, however, the court found that the city had sufficient authority under specific enabling legislation. b. Enabling Laws. Courts have also held that implied authority to impose impactfees may be found in specific state enabling legislation relating to zoning, water, sewers and other matters. For example, in Coulter v. City of Rawlins,58 plaintiffs alleged that the City of Rawlins did not have statutory or constitutional authority to enactordinanceswhichreguired developers to payfees forwater and sewer line connections and dedicate land or pay fees in lieu thereof for parks and recreational purposes. In regard to the water and sewer line connection fees, the Wyoming statutes expressly authorized the cities and towns to provide and regulate the channels of streams, water courses and any other public water i sources or supplies within the city.60 The court found that implicit in the power to provide municipal services is the power to construct, maintain and operate the necessary facilities, and that the fixing of fair and reasonable rates for utilities services is an incident of the authority given by the Constitution and the statutes to provide and maintain those services.s' Thus, the Supreme Court of Wyoming upheld the ordinances as a proper exercise of the city's implied authority. Asfar as the imposition of park dedication requirements, the Wyoming statutes authorized cities and towns to hold and acquire property for the purpose of establishing parks and recreational facilities, and to regulate parks. The I rcourtheldthatthesestatutoryprovisionsauthorizedthecitytoimposeitspark 96 dedication or in-lieu fee requirements.ez The Florida state statutes grant counties the power to carry on government, including, to the extent not limited by general or special laws, the power to provide and regulate roads and related facilities:B3 (1) The legislative and governing body of a county shall have the power to carry on county government. To the extent not inconsistent with general or special law, this power shall include, but shall not be restricted to, the power to:... . (m) Provide and regulate arterial, toll, and other roads, bridges, tunnels and related facilities . (w) Pertorm any other acts not inconsistent with law which are in the common interest of the people of the county . In Hnmo Riiilrlarc and Contractors Association of Palm Beach County Inc v Board of County Commissioners of Palm Beach Countv,80 the Florida District Court of Appeals affirmed the lower court's finding that these provisions conferred authority on anon-charter county to enact a road maintenance fee. Authority to require various exactions and fees has been found in a statute granting municipalities the power to collect charges for connection to or use of water and sewage facilities;65 under grant of power to municipalities to own and operate public utilfties;B6 under statute which authorized villages, in proper cases, to require that a subdivision map must show park land suitably located for playground or other recreational purposes;87and in provisions of a subdivision act, stating that the purpose of the act included facilitation of adequate provision for transportation, water, sewer, schools, parks and playgrounds.6B c. Authority to Regs~late for the General Welfare A minority of cases have held that the power to impose development exactions, impact fees, and regulate planning and subdivisions arises from statutory provisions granting municipalities the power to regulate for thehealth,safety,andgeneralwelfare. InCally City of WestJordan,68theSupremeCourtofUtahheld that an ordinance which required subdividers to dedicate land or pay cash in lieu of dedication for flood control and/or park and recreation facilities was within the scope of authority and responsi bility of the city government in the promotion of the health, safety, morals and general welfare of the community. The Supreme Court of Utah based its opinion on a series of statutes that granted the city broad authority to preserve and promote the health, safety, morals and general welfare of the community. The statutes relied upon included a provision that authorized cities to regulate the location of buildings, and further provided that such regulations were to facilitate the providing of transportation, water, sewage, schools, parks and other requirements.70 The court stated: "If the above statutes are viewed together it seems plain enough that the ordinance in question is within the scope of authority and responsibility of the city government in the promotion of the 'health, safety, morals and general welfare' of the community."" d. gases Finding No Authorityto Impose Exactions. Other cases have concluded that local governments are not authorized to impose certain exactions, especially for off-site improvements, under the state's enabling legislation. For example, in Arrowhead na~a R nt gmoany v Livingston Count~Road Commission,' the Supreme Court of Michigan held thatthe county road commissioner exceeded its statutory powers in conditioning subdivision platapproval on the developer's agreement topayforoff-site road improvements. The court rejected theargumentthat a statutory grant of power to the road commissioner to "keep in reasonable repair, so that they shall be 97 reasonably safe and convenient for public travel, al I county roads", provided an implicit grant of authority to exact off-site road improvements. Significant to the court's decision were: 1) the fact that the statute specifically provided that permissible methods of financing road improvements were borrowing and taxation; 2) provisions of the subdivision act limiting considerations on which approving authorities were permitted to condition approval, which did not include off-site road improvements; and 3) the absence of any statutory provision defining suitable standards governing cost allocation for off-site improvements. In Kamhi v Planning_Board of the Town of Yorktown,73 the Court of Appeal of New York held that the town had no power to compel a landowner to convey approximately 40% of his land to the town for park purposes as a condition of approval of a cluster development. The relevant state statute provided that in the event a cluster development resulted in showing lands available for park, recreation and open space directly related to the plat, the planning board, as a matter of plat approval, "may establish such conditions on the ownership, use, and maintenance of such lands as it deems necessary to assure the preservation of such lands for their intended purposes". The developer was willing to develop the land in question for a park, but was unwilling to dedicate the land. The court determined that the statutory provision did not authorize dedication of land without compensation nor payments in lieu of dedication. The court based its decision on the fact that the most notable feature of the provision, when compared with other similar planning statutes, was the absence of language expressly authorizing dedication of land without compensation or payment in lieu thereof. Furthermore, the provision did not contain language by which the court could find an implied grant of authority. The Supreme Court of New Jersey in New Jersey Builders Association v. Mayor and Townshi~ommittee of Bernards Townshio,74 recently held that the requirement that a developer pay a portion of the township's long-term road improvement plan exceeded the township's authority, in spite of specific state enabling legislation authorizing municipalities to require a developer "as a condition of approval of a subdivision or site plan, to pay his pro-rata share of the cost of providing only reasonable and necessary street improvement ...located outside the property limits of the subdivision or development but necessitated or required by construction ar improvements within such subdivision or development."75 The ordinance in question required developers to pay a portion of the township's long-termtwenty-million dollar road improvement plan. The ordinance was based on a transportation study which summarized existing traffic conditions, made traffic projections, and set forth road improvements deemed necessary to accommodate current and anticipated development. The study allocated these costs between existing and future development, and further allocated the costs to be borne by future development according to the number of trips that a particular type of development would generate. The court held, in a somewhat narrow interpretation, that th is ordinance was an invalid exercise of the power delegated under the statute, stating that the legislative intent of the enabling legislation was "to limit municipal authority only to improvements the need for which arose as a direct consequence of the particular subdivision or development under review".'~ The court felt that the Legislature had not delegated (by this ordinance) to the municipality the "far reaching power to depart from traditionally authorized methods of financing public facilities so as to allocate the costs of substantial public projects among new developments on the basis of their anticipated impact."" Finally, even where sufficient state enabling legislation exists, the imposition of a development exaction may be deemed to be unauthorized if the local government has not promulgated sufficiently specific standards within their regulations for determining the extent to which the developer must bear the cost of improvements, or for assessing the adequacy of the improvements to be provided.7e The question of local government authority to enact exactions or impact fee ordinances seems to have become less of an obstacle than it has been in the past.78 If a court is convinced that there is a need for the facilityfor which the exaction or fee is levied, it may find that even the most general enabling provisions 98 confer sufficient authority.80 However, as seen from the cases discussed above, the authority of a local government to impose exactions must always be considered as a critical element in enacting any such ordinance. Some authorities believe thata possible solution to anyremaining doubt as tothe authority of the counties to adopt impact fee ordinances is the enactment of a statewide enabling act.81 They argue that such an act would have the advantage of removing any doubt as to the authority of the counties to enact such ordinances, and could provide guidelinesfor their implementation.82 However, as shown by the B rn r s Township case above, such legislation may act asa limitation on a local government's powers, depending on the skill of the drafter. B. Constitutional Challenges to Impact Fees. As discussed above, the first issue addressed by any court in a challenge to an impact fee or other development exaction is whether the municipality is authorized under state law to adopt the measure in question. If the ordinance or law in question is found to be enacted without sufficient legal authority (i.e. ultra vires), the law or ordinance is struck down. If, on the other hand, the local government is found to have the authority to enact the law or ordinance it must then pass certain constitutional requirements. Local governments adopt land use controls underwhat is known as its "police power". Various provisions contained in both state and the federal constitutions place limitations on the exercise of this power. There are generally three avenues of constitutional challenge to impact fees. The ordinance may be challenged as a violation of due process, as a violation of equal protection, or asa "taking" of property without just compensation. Althoughathoroughdiscussionoftheseconceptsisbeyondthescopeofthis article, the following discussion briefly explains the basis of each challenge. It should, however, be noted that challenges to impactfee ordinance and development exactions frequently raise all three challenges. A number of jurisdictions appear to apply the same standard in their examination to all three challenges, examining the reasonableness of the regulation under the standards described more fully below.as t . Due Process Challenges. The Fifth Amendment of the United States Constitution, applicable to the states under the Fourteenth Amendment, provides that no person shall be deprived of life, liberty, or property, without due process of law. Land use controls, including development exactions, must satisfy the limitations placed on police power regulation by the due process clause. Courts have interpreted this clause to mean that the exercise of the police power must serve the community's public health, safety and welfare.84 Generally speaking, due process claims assert that the development exaction is beyond the authority of the police power (i.e. lu tra vires) because it is arbitrary and capricious, lacking a rational basis, or unfair. If the measure is rationally related to a permissible objective, it is generally sustained. 2. Fgual Protection Challenges. Under the Fourteenth Amendment of the United States Constitution, a state may not "deny to any person within its jurisdiction the equal protection of the laws". Equal protection analysis focuses on whether the use of the various categories in the ordinance or the applicability of the ordinance to a particular development producesadiscriminatoryresult. The traditional judicial standard of review applied in equal protection cases requires that the classification be reasonably related to a legitimate public objective,85 Equal protection challenges thus overlap with substantive due process challenges. A recent federal court case, Parks v. Watson,B~ struck down a local dedication requirement on equal protection grounds. The City of Klamath Falls, Oregon had required that the developer dedicate 99 geothermal wells on its property in exchange for the city vacating platted streets. The Ninth Circuit Court of Appeals found that the City of Klamath Falls had treated the developer differently from others, and that the requirement imposed was not rationally related to the government's interest in the platted streets. Therefore, the dedication requirement was found to be unconstitutional.87 3. "Takings" Challenges. The other possible challenge to an impact fee ordinance is that the ordinance is an unconstitutional "taking" of property without just compensation. The Just Compensation clause contained in the Fifth Amendment of the United States Constitution, applicable to the states via the Fourteenth Amendment, and comparable provisions in state constitutions forbid the tak ing of pu blic property for public use without just compensation. One of the principal purposes of the Just Compensation clause is to"bar Government from forcing some people alone to bear public burdenswhich, in all fairness and Justice, should be borne by the public as a whole."e8 Thus, if a regulation goes "too far," it will be deemed a taking of property which requires just compensation. es There is no clearly established test to determine when a land use regulation effects a "taking." The United States Supreme Court explained in Penn Central Transportation Co. v. New Yo k i ,80that"whetheraparticularrestrictionwill be renderedinvalidbythegovernment'sfailuretopay for any losses proximately caused by it depends largely upon the particular circumstances in that case." Over the last several decades, the courts have develo~ed a variety of tests for the takings chat lenge which have been adapted to the particular facts in dispute. A recent United States Supreme Court case, Kevstone Bituminous Coal Association v. DeBenedictis,°Z illustrates the tests which the United States Supreme Court has applied most recently in examining a takings claims. In Kevstone, the United States Supreme Court upheld a statute requiring coal mine operators to leave a certain amount of coal in the ground for support of surtace structures. The Court found that: 1) the statute did not deny the coal mine operators economically viable use of their land nor materially affected their investment backed expectations; 2) it was enacted for the express purpose of the public's health and safety and was a valid exercise of the police powers; and 3) it substantially advanced the state's interest. The Court has acknowledged that a broad range of purposes satisfies the requirement that a regulation be for a legitimate state interest. Hawaii Housin® Authorit~v. Midkiff,93 involved a challenge to the Land Reform Act of 1967 (Act) on the ground that it violated the "public use" requirement of the Fifth and Fourteenth Amendments. The Act, under which real property was to be taken from lessors for sale to lessees, was premised on the Hawaii Legislature's determination that the concentration of ownership of land had resulted in skewing the State's residential fee simple market, inflating land prices and injuring the public tranquility and welfare.BO In upholding the validity of the Act, the United States Supreme Court stated that the "pu blic use" requirement was coterminous with the scope of a sovereign's police powers. es In defining the public interest, the Supreme Court noted that: "[tjhe definition is essentially the product of legislative determinations addressed to the purposes of government, purposes neither abstractly nor historically capable of complete definition. Subject to specific constitutional limitations, when the legislature has spoken the public interest has been declared in terms well-nigh conclusive. In such cases the legislature, not the judiciary, is the main guardian of the public needs to be served by social legislation X96 The United States Supreme Court has recently applied these tests in an exactions case. As discussed more fully below, the Court held that the California Coastal Commission's requirement that a landowner dedicate an access easement as a condition to a permit to rebuild a residence was an unconstitutional taking without just compensation.97 The Court stated that a land use regulation must "substantially advance" a legitimate state interest to withstand a takings challenge.88 The Court further explained that 100 a takings challenge involves a higher level of scrutiny than either a due process or equal protection clafm.° C. Case Law Development Regarding Impact Fees. Three major tests have emerged in determining whether development exactions and impact fees are a "reasonable" exercise of the police power: 1) whether the need for the infrastructure is "specifically and uniquely attributable" to the new development; 2) whether there is a "general public need" for the infrastructure, as this standard has been developed by the Calfornia courts; and 3) whether there is a "rational nexus" or "reasonable relationship" between the exaction and the need created by the new development. The "rational nexus" test has emerged as the prevailing standard for evaluating exactions and impact fees in most states. In addition, the Supreme Court's recent decision in the l~l ~n case may establish a fourth test. Each of these tests is discussed more fully below. t . ecifically and Uniquely Attributable. The "specifically and uniquely attributable" test is the most conservative approach. Under this test, subdivision exactions are justified onl~r if the fees collected exclusively benefit the subdivision which created the need for the new facilities. 00 This requirement was established by an Illinois case, Pioneer Tr~~ar and Savings Bank v. Village of Mount Prospect.101 In Pioneer Trust, a municipality had Imposed a requirement of the dedication of 6.7 acres of land for educational purposes as a condition to approval of a subdivision plat for 250 homes. The parties had agreed that the 250 homes would aggravate the existing need for new schools. The Illinois Supreme Court invalidated the requirement on the grounds that the need for schools was created by the development of the community as a whole and could not be "specifically and uniquely attributed" to the new development. The court further noted that the school problem, which was a result of total community development, was one which the subdivider should not be required to pay the entire cost of remedying.102 The Illinois Supreme Court, however, may be moving away from a strict application of this test. In Kruqhoff v City~f Naperville, 7O3 the Supreme Court of Illinois held that a subdivision requirement of dedication of land or fees in Ileu of land for school and park purposes was valid so long as the required contributions were uniquely attributable and fairly proportioned to the needs created by the proposed development. The Appellate Court of Illinois has noted that the Illinois Supreme Court is tending toward a more liberal interpretation of the validity of exaction ordinances while maintaining the requirements of proportionality and specific attributability.'oa The "specificallys and uniquely attributable" test has been adopted by only a few states, including Ohio,'os Connecticut, 7O and Rhode Island.'07 In those states where it has been applied, this test has been used, for the most part, to prohibit the use of exaction and development fees to finance infrastructure that provide community-wide benefits, such as schools, parks, and recreation facilities, or to finance road and utilities that provided benefits beyond the development area.108 2. The General Public Need Test. I In regard to the above, California courts find themselves at the opposite end of the spectrum. The California courts very early articulated a "reasonable relationship" test in examining the validity of exactions. However, that standard appears to have been abandoned over the years, with the courts requiring little, if any, relationship between the need created by the new development and the exaction in question. The California Su~rreme Court first adopted a "reasonable relationship" test in 1949 in Byers v. Ciri Council of Los Angeles.' ° The Avers court upheld a requirement for dedication of a road abutting a subdivision 101 that provided benefits to the community as a whole as well as to the development. The court found that so long as a condition is "reasonably related" to increased traffic and other needs of the proposed subdivision, it was not contrary to constitutional concepts.7O In subsequent cases, the California courts have required less of a relationship to exist between the needs created by the development and the exaction in question. For example, in Associated Home Builders of the Greater East Bay, Inc. v. GiN of Walnut Creek,"'the California Supreme Court upheld a statute that authorized counties to require that subdivisions dedicate land or pay fees in lieu thereof for park and recreational purposes. The statute further provided that the amount and location of land to be dedicated or the fees to be paid must bear a reasonable relationship to the use of the park and recreational facilities by the future inhabitants of the subdivision. The court appeared to question whether such a connection was required by constitutional considerations, and stated that it had no doubt that the requirement of dedication of park land could be justified on the basis of a "general public need" for recreational facilities caused by present and future subdivisions.12 Subsequently, in Norsco Enterprises v. City of Fremount,13 the court upheld a requirement that a developer pay fees in lieu of dedication of recreational land where the developer converted existing apartment units into condominiu m u nits. The court held that the validity of the exaction was not dependent upon proof that the need for public facilities was created by the project. Rather there must only be a general public need for the public facilities resulting from existing and new developments.10 The California courts have also been very liberal in upholding dedication requirements for public access imposed by the California Coastal Commission.76 For example, in Grupe v. California Coastal Commission, 76 the court upheld an access requirement, and stated that under California law there need be only an indirect relationship between a proposed exaction and a need to which the development contributes."' As discussed more fully below, the California state courts have also upheld "linkage" programs, which are considered by many to be the most difficult type of impact fee program to justify because of its somewhat tenuous relationship drawn between the exaction and the development. (See Chapter IV, Subchapter A). Thus, the California state courts have generally required only that a mere relationship exist between the need created by the development and the exaction imposed in order to validate the law in question. This trend, however; has recently been brought to a halt, as shown below. 3. The Rational Nexus Test. The prevailing standard for evaluating exactions is the "rational nexus" or "reasonable relationship" test. While courts articulate both standards, this author believes the tests are essentially the same, with the court examining whether there is a sufficiently close relationship between the exaction imposed and the need created by the new development. The term "rational nexus", as used in this article, encompasses both tests. The rational nexus analysis has evolved over several years in a number of state courts. While the test is not applied uniformly, courts will generally examine three issues. First, the court will determine if the developmentwillcreate aneed for new capital facilities. Second, itwill examine the relationship between the needs created bythe development and the amountof required payment. This is the crux of the rational nexus test, and courts have become increasingly sophisticated in reviewing the proportionality of thefee. Third, the court will examine the extent to which the fee collected benefits the development that it is assessed against.'re a. Development of the Rational Nexus Test. 102 The rational nexus test first emerged in 1966 in Jordan v. Village of Menomonee Falls.7B In Jordan, the Supreme Court of Wisconsin upheld a requirement of dedication, or fee in lieu of dedication, of schools and parks, based on the costs of the portion of the facilities needed by the new development. The court rejected the "specifically and uniquely attributable" test, stating that it was virtually impossible for a municipality to prove that a new development was the sole beneficiary of public facilities. The court concluded that a required dedication of land for school, park or recreational sites as a condition for approval of the subdivision was a valid exercise of the police power if the evidence establishes that the municipality will be required to provide such facilities as a result of the approval. It further found that the evidence before it established such a "reasonable connection" between the need created by the subdivision and the conditions being imposed.f20 A similar standard was articulated b~r the Missouri Supreme Courtin Home Builders Association of Greater Kansas City v. CiN of Kansas Citv. Z' In that case, the court also rejected the "specifically and uniquely attributable" test, and adopted the following test: "if the requirement is within the statutory grant of power to the municipality and if the burden cast upon the subdivider is reasonably attributable to his activity, then the requirement is permissible; if not, it is forbidden and amounts to a confiscation of private property in contravention of the constitutional prohibitions rather than reasonable regulation under the police power." 122 The court, therefore, determined that to the extent that a su bdivision increases the recreational needs of the city, the cost of meeting this increase in needs may be required of the subdivider. Much of the litigation involving impactfees has occurred in Florida. Thefirst Florida case to announce the legal standards under which it would evaluate impact fee ordinances was Contractors & Builders Association of Pinellas CountKv. Ci of Dunedin.729 The Dunedin court held that local governments can impose impact fees which do not exceed a pro rata share of the reasonably anticipated costs of capital expansion reasonably required because of new development, so long as the use of the money collected is limited by law to meeting the costs of that capital expansion. This case has been cited by many authorities as supporting this proportion in legally defensible impactfees. The court, however, concluded thatthe ordinance under reviewwas defective because itfailed to include sufficient restrictions on the use of the money collected. The ordinance was later amended to provide that the fees could be used only for the expansion of the water or sewer system, and was upheld.'24 The Florida courts next addressed the issue in Wald Corp. v Metrgpolitan Dade Countv.725 In Wald, the court upheld an ordinance requiring the dedication of drainage canal rights of way and maintenance easementsasaconditionofsubdivisionapproval. The court enunciateda"rationalnexus"test, ruling that impact fee ordinances are valid when there is a reasonable connection between the required dedication or fee and the anticipated needs of the community because of the new development. In Hollyv~rood Inc v Broward Countv,12B the court upheld an ordinancewhich required the dedication of land or a fee payment for county parks as a condition to plat approval. The court reviewed the previous impact fee and dedication cases, and articulated the test to be applied in such cases. First, the local government must demonstrate a reasonable connection, or rational nexus, between the need for additional facilities and growth in population generated by the subdivision. Second, it must show a reasonable connection, or "rational nexus," between the expenditure of the funds collected and the benefits accruing to the subdivision. To satisfy the second test, the ordinance must specifically earmark the funds collected for use in acquiring capital facilities to benefit the new residents.127 In upholding the ordinance in question, the court first found that the standard contained in the county's park program of three acres of land for every 1,000 residents, upon which the impact fee ordinance was based, was reasonable and possibly even low. The county had also shown that growth generated by new subdivisions would require the county to acquire and develop new lands in order to maintain its standard. Finally, the ordinance limited use of the funds to acquiring new park land within fifteen miles of the platted land. 103 Since its inception in 1966, the "rational nexus' test has been adopted by several state courts.128 Cases in Florida and other states have refined and clarified the requirements of this test. b. Application of the Rational Nexus Test. i. Need created 4Y the new development. ' The first requirement of the "rational nexus" test is that the development which is to be assessed creates a need for the service or facility for which it pays. Some courts find it apparent, or have taken judicial notice of the fact, that development creates a need for certain services and facilities.728 The Utah ' Supreme Court, in Call v. City of W. Jordan,130 found it "apparent" that subdivision activity increases the need for flood control measures and recreational facilities, without examining any evidence of need. At least one court has found that the local government's statutory authority to levy the exaction is sufficient to show a need. 731 Other courts have upheld sewer and water connection feeswithout requiring evidence of the extent of the impact of new development on the principle that such fees are a fair and reasonable means to offset the impact of new users. 3z Finally, some courts place the burden on the person challenging the ordinance to show that no need is created by the new development. For example, the Supreme Court of Texas, in Citv of College Station v. Turtle Rock Corp., 739 placed the burden on the challenger of the subdivision park fee to show there was no reasonable connection between the increased population from the subdivision and the increase in park needs. In Turtle Rock Corp., since the challenger failed to present any evidence to show that the ordinance was arbitrary or unreasonable as applied to it, the ordinance was upheld. Likewise, in r n v Ville of Menomonee Falls, 734 the court suggested that in the absence of evidence to the contrary, a showing by the municipality that over time new subdivisions will generally create a need for parks and schools would be sufficient to establish that the need was occasioned by the developer. It, therefore, appears that with respect to exactions for many kinds of facilities, establishing that the new development will create some need for additional facilities is not a serious obstacle. ii. Proportionality of the fee. The second requirement of the "rational nexus" test limits the fee to a proportionate share of the cost of a facility that serves those paying the fee. This is the crux of the "rational nexus" test. Several cases have held that a regulation that imposes a flat percentage dedication or fee in lieu of that requirement is unconstitutional on its face.735 For example, in Frank Ansuini. Inc. v. City of Cranston, rsc the requirement of dedication of "at least seven percent" of the land of a subdivision for recreation purposes as a condition of subdivision approval was held to be clearly arbitrary on its face. Likewise, in J E D Associates Inc v Town of Atkinson,'37 a requirement of dedication of seven and one-half percent of the total land in a subdivision for playground or other town use as a condition to subdivision approval (without consideration of the town's need for the land) was held to be arbitrary and an unconstitutional taking. The court stated that the law appeared to be "an out and out plan of extortion."'33 Courts which have struck down such requirements have done so because there is no showing that the fees or exactions bear any reasonable relationship to the needs being engendered by the new development.738 Although some courts have upheld such requirements, 140 they are clearly subject to challenge. Several recent decisions haves invalidated exactionswhere the exaction was substantiallydisproportionate to the need generated by the new development.741 For example, in Cupp v Board of Supervisors of Fairfax Countv, 742 a requirement that the owner of a nursery dedicate a portion of his land and construct a roadway as a prerequisite of expansion of the nursery was held unconstitutional where the evidence 104 showed that these requirements were unrelated to any need generated by use of the property. Likewise, in Kittery Water District v. Town of York, 143 a requirement that the water district allow public access to its reservoir as a condition of approval to construct a reservoir was held invalid because there was no evidence that the public held a legal right to use the area in which the reservoir would be located for recreational activities. As the use of exactions becomes more commonplace, attention of the courts is shifting in some states to defining more precisely how to judge the relationship between the need created by the development and the cost imposed. The Texas Supreme Court, in City of College Station v. Turtle Rock Corporation,1°' considered a mandatory subdivision parks fee in Ileu of dedication. In remanding the case for further fact-finding, the court stated that in assessing the fee, both the needs of the city and benefits to the subdivision should be considered, and suggested that the following factors be consideredwhen reviewing the ordinance: the size of the subdivision lots, the amount of open land consumed by the development, and the economic impact of the subdivision.1°s The New Hampshire Supreme Court has provided some guidance in examining the requirementof off-site road exactions in LandlVest Properties Inc. v. Town of Plainfield.1OB In that case, the court reversed a determination of the trial court of the appropriate allocation based solely on the frontage of the subdivision on the roads in question. The court stated that no single factor was determinative, and instead suggested severalfactorstobeconsidered,including: the standardtowhichthetownpresentlymaintainstheroads, the frontage of the proposed subdivision, the potential traffic increase resulting from the subdivision, the potential for development and existing character of the neighborhood served by the road, and the number of residences presently fronting on or normally trafficking the roads.1f7 The court also stated that where a town is faced with an excessive expenditure, its fair share of the cost may be allocated to the developer to accommodate the town's inability to pay. Courts in some states are also developing increasingly sophisticated analyses and cost-accounting methods in addressing the issue of how development fees and exactions should be set in light of broader public financing questions. These courts have addressed two situations. First, when a previously constructed capital facility has excess capacity, a fee may be assessed to recoup a portion of the cost of the facility. Second, a capital facility may be financed through a mix of revenue sources. If the development pays for the facility through more than one revenue source, this may result in a double payment.748 InBanberryDevelopmentCoroorationv South JordanCitv,708theUtahSupremeCourtrecognizedthese issues and suggested seven factors that should be considered when evaluating impact fees for a municipal service that employs an extensive central facility like water or sewer:'so 1) the cost of existing capital facilities; 2) the manner of financing existing capital facilities (such as user charges, special assessments, bonded indebtedness, general taxes, or federal grants); 3) the relative extent to which the newly developed properties and other properties in the municipality have already contributed to the cost of existing capital facilities (by such means as user charges, special assessments, bonded indebtedness, general taxes, or federal grants); 4) the relative extent to which newly developed properties and the other properties in the municipality will contribute to the cost of existing capital facilities in the future; 5) the extent to which the newly developed properties are entitled to a credit because the municipality is requiring their developers or owners to provide common facilities (inside or outsidethe proposed development) that have been provided by the municipality and financed through general taxation or other means (apart from user charges) in other parts of the municipality; 6) extraordinarycosts, if any, in servicing the newly developed properties; and 7) the time-price inherent in fair comparisons of amounts paid at different times. t05 The court noted that in applying these factors, the municipalities must be given flexibility and the power to deal realistlcallywith unforeseen or unanticipated events. The court alsoconsidered improvementfees for dispersed resources, such as park and recreation fees. The Utah Supreme Court stated that in addition to the above guidelines for allocating burdens, the benefit derived from the exaction must be of "demonstrable benefit" to the new development.761 The Utah Supreme Court subsequently reversed the decision of a trial court which upheld various connection fees in Lafferty v. Payson Citv.'SZ In Lafferty, the lower trial court had found connection fees reasonable because in each case, the per-unit cost of the service to be provided was substantially in excess of the amount of the connection fee. The Supreme Court of Utah reversed. The Supreme Court found that the measures relied upon by the trial court in determining that the fee was reasonable, i.e., the unit cost of the service based upon the cost of expanding needed facilities, fixed the entire cost of new facilities on newly developed properties without assurance that the costs were equitable in relation to the benefit conferred and in comparison to the costs imposed by other users. The court explained that itwas possible that the new owners could be burdened with all of the cost of expanding the services plus a portion of the costs of the existing ones. The court remanded the case with instructions to apply the factorssetforthin n rr ,notingthatthosesevenfactorsshouldputthenewhomeowneronessentially the same basis as the average existing homeowner with respect to costs borne in the past and to be born in the future, in comparison with benefits already received and yet to be received. Similar issues were reviewed by the Supreme Court of New Jersey. In White Birch Realty Corp. v. Gloucester Township Municipal Utilities Authoritv,753 the court addressed the problem of recoupment in a dispute involving a sewage connection fee. The court required that the new connectors pay a fair contribution to the debt service charges previously paid by others. The court further made a detailed examination of the various bond term requirements and the actual number of units connected in each previous year to determine the new user's fair share. Based on the foregoing, it appears that the analysis used by courts in evaluating the reasonableness of impact fees and exactions can become rather sophisticated, and can result in requiring that ordinances which set fees accurately assess the needs created by the new development and take into account other sources of financing for the facility. iii. uca of funds within a spg~ified period of time. The next step in the "rational nexus" test requires that a rational nexus exist between the use of the funds and the benefits to the development.154 Courts have approved various methods used to assure that the funds are used to benefit the development. Many courts have required that the funds collected be segregated from general funds and earmarked for the facility for which they were collected. This requirement stems from the rationale that fees which are commingled with general revenues are unauthorized taxes. For example, the Florida courts have insisted that funds be earmarked for the facility to be constructed. In Contractor and Builders Association of Plnallac Cni~nty V Citv of Dunedin, 755 the Florida Supreme Court struck down a fee for sewer and water connectionforfailingtosufficientlyrestrictthefunds. The ordinance was subsequently upheld after it had been amended to provide that the fees collected could only be used for the expansion of water or sewer systems, and a trust fund was established for the funds.158 Courts in Wyoming, Oregon, and New York have also required thatfunds be earmarked as a guarantee that theywill be expended for the benefit of the development which pays them.157 Some municipalities have further assured that the fees collected will be expended for the benefit of those paying them by dividing the area into districts, and "localizing" expenditure of the funds by requiring that they be spent in the district in which they are collected. The Florida court approved such districting in 106 Home Builders and Contractors Association of Palm Beach County Inc v Board of County Commissioners of Palm Beach County.rsa Refund provisions in impact fee ordinances also help to assure that the development which pays the fee will be benefited by it. For example, the road impact fee in Home Builders78 required that the funds collected must be spent no later than six years after being collected, or must be returned to the current owner of the property. Similarly, courts have struck down dedication requirements where the land is taken for "banking" purposes. In 181 Incorporated v. Salem County Planning Board,78O the court held that the municipality's requirementthatthe subdivider dedicate an additional right-of-way bordering upon county roads for a future widening was an unconstitutional taking, since the mun icipality did not demonstrate that the widening was needed and there was no plan for the imminent use of the land. The court held that the dedication must befor "specific and presentlycontemplated immediate Improvements, notforthe purpose of 'banking' the land for use in a projected but unscheduled future use". iv. Conformance with Plans. Impact fee ordinances should implement comprehensive land use and public facilities or capital improvement plans, both in order to relate the fees to the needs generated by the new development and to ensure that the planned improvements adequately benefit the development paying the fee. Several cases have relied on conformancewithsuchplansinupholdingimpactfees. For example, in Hillis Homes. Inc v Public Utility District No. 1 of Snohomish Countv,7B1 the Supreme Court of Washington upheld a general facilities charge imposed to fund capital improvements to the water system. The charge was based on a detailed long range plan identifyf ng the facilities that would be needed within the next ten years. Because the court concluded that the fee was assessed as a part of an overall plan to regulate the use of water, it upheld the fee against a challenge that it was an unauthorized tax.182 v. Challengj~rg the Fee Schedule. A final requirement which has been suggested is that there be adequate provision for those who pay the fee to challenge the criteria on which the fee is based.783 This was the casein Home Builders'0' in which the ordinance contained a provision allowing the developer to submit his own study of traffic and economic data in order to demonstrate that his share should be less than the amount established under the ordinance. 4. Nollan - A Fourth Test? a. The Nollan Decision. Recently, the United States Supreme Court considered development exactions for the first time in Nollan v California Coastal Commission.7B5 The case involved the imposition of a public beach access requirement upon a private landowner by the California Coastal Commission. Mr. and Mrs. Nollan owned a beachfront lot in Ventura County, Calffornia straddled by two public beaches, the firsta quarter of a mile north and the second approximately 1800 feet south of their lot. A concrete seawall separated the beach from the Nollans' property.16B The lot contained a small cottage, which over the years had been rented to summer vacationers and now was in a state of disrepair. The Nollans decided to demolish the cottage and replace it with a new home, which required a coastal development permitfrom the California Coastal Commission. The Commission's staff recommended that the permit be granted su¢ject to a condition that the Nollans allow the public an easement to pass across a portion of their properL~y bounded by the mean high tide line on one side and the seawall on the other. This the Commission felt would make it easier for the public to traverse between 107 767 the two nearby public beaches. The Nollans objected to the access requirement and petitioned the Ventura County Superior Court to invalidate the access condition. They argued that the condition could not be imposed absent evidence that their proposed development would have a direct adverse impact on public access to the beach. The court agreed and remanded the case to the Commission for findings on this issue.1B8 On remand, the Commission made the following findings to justify the public beach access requirement: 1) that the proposed dwelling would increase the blockage of the view of the beach; 2) that the new dwelling would contribute to awall of residential structures thatwould preventthe public "psychologically" from realizing that a stretch of coastline existed nearby; 3) that the new house would also increase the private use of the beach area; and 4) that the construction of the new dwelling along with the other development would "cumulatively burden" the public's ability to traverse to and along the beach.788 The Nollans again petitioned the court to invalidate the access condition on the ground that the condition constituted a taking without just compensation. The lower court ruled in favor of the Nollans. The Commission appealed this ruling to the California Courtof Appeals, which subsequently reversed the lower court.' 7° The court ruled that the access requirement was authorized by statute and that it did not violate theConstitutlon. The Nollans then appealed to the United States Supreme Court, claiming that the access requirement constituted a taking of propertywithout just compensation in violation of federal constitutional guaranties. The United States Supreme Court found that the public beach access condition imposed by the Commission constituted a taking of property without just compensation. The Court first established that if the Commission had simply required dedication of the easement without compensation, there would have been a taking of property. The question rather narrowly posed was whether requiring the conveyance of the easement without compensation as a condition for issuing a land use permit alters this outcome. r 71 The Court set forth the standard which it had previously recognized in evaluating whether a land use regulation constitutes an impermissible taking, stating that a "land use regulation does not effect a taking if it'substantially advances legitimate state interests' and does not'deny an owner economicalN viable use of his land"'.172 In a footnote, the Court differentiated between this standard and the standard governing equal protection and due process claims, where the court need onl~ find that the state could "rationally have decided" that the measure might achieve the state's interest.' s The Court noted that its cases have not elaborated on the type of connection required between the regulation and the state's interestfortheformerto"substantiallyadvance"thelatter. The cases have made clear, however, that a broad range of government purposes satisfies the requirement. The Court, therefore, assumed that the purposes advanced by the Commission for requiring the beach access were legitimate purposes.774 In assuming that the Commission's purposes were legitimate, the Court reasoned that the Commission could prohibit the construction of the house altogether if the house would substantially impede the Commission's purposes, unless the denial of construction would interfere so drastically with their use of the property as to constitute a taking. If the Commission could constitutionally deny the~ermit altogether, it could also attach to the permit conditions which accomplished the same purpose.' s After carefully examining the reasons advanced by the Commission, however, the Court found that the condition "utterly failed to further the end advanced as the justification for the prohibition".776 The Court found that this lack of "essential nexus" between the condition imposed and the original purpose of the 108 building restriction converted the state's purpose into simply obtaining an easement without payment of compensation. The Court did not address the issue of how close a fit is required between the condition and the burden created by the Nollans' beach cottage. The Court accepted for purposes of discussion the Commission's proposed test that the condition must be "reasonably related" to the public need or burden created, but found that the conditions in question did not meet even the most untailored standards.1e The Court further stated that its conclusion on this point was consistent with the approach of every other court that has considered the question, with the exception of the California state courts. In sup~ort of this statement, the Court cited numerous state court cases dealing with development exactions. 7e Finally, the Court stated that in requiring that a condition for abridgment of property rights "substantially advance" a legitimate state interest, it was inclined to be particularly careful where the actual conveyance of property was made a condition to the lifting of a land use restriction, since in that context there is heightened risk that the purpose is avoidance of the compensation requirement.'ao b. Effect of Nollan on Imr~act Fees Authorities differ on the effect of the Nollan decision on development exactions. Some say that the most significant impact of Nollan Is to bring California in line with the majority of state courts, and that Nollan does not seriously affect the standards adopted by most state courts for evaluating impact fees and development exactions.187 Others believe that the Court has heightened the standard of review for development exactions.'BZ Still others feel that Nollan is of very little significance to impact fees and takings issues i.e., the takings test has essentially remained the same. It appears that while Nollan may add a new dimension to the review of impact fees, the decision wil I not seriously affect the proportionality standards which have been adopted by state courts. Nollan does appear, however, to represent a strong reminder to local governments across the country to follow the "rational nexus" test more closely. The focus of the Supreme Court in Nollan was slightly different than that of most state courts. In Nollan, the Courtaddressed the relationship that must exist between the governmental purposefor the regulation and the nature of the condition imposed. The Court restated the standard previously set forth in Agins v. T' r n.183 In that case, the Court held that in order to survive a takings challenge, a land use regulation must "substantially advance" a "legitimate state interest", and may not deny the owner economically viable use of the property. The Courtin Nollan further stated that in the absence of an "essential nexus" between the purpose of the regulation and the condition imposed, a land use regulation will be deemed a taking. The Nollan Courtfound a complete lack of anyconnection between the access condition imposed and the purposes for which the Commission sought to restrict construction, which was primarily visual. This inquiry is different from the typical inquiry of most state courts. Ostensibly, state courts assume, for example, that there is a "nexus" between an impact fee being charged and the community's interest in providing for the particular capital facility. The central issue faced in these cases is whether the amount of the fee was proportional to the need created by the new development. Because the Nollan Court focused on the presence of a nexus and found absolutely no nexus between the purpose of the building restriction and the condition imposed, it never reached the issue of the proportionality of the condition to the burden created by the development. Since the Courtin Nollan found a complete absence of any relationship between the stated purpose and the condition imposed, it is difficult to determine whether the "essential nexus" which the Court spoke about differs in any way from the "rational nexus" test which is currently used by most state courts. For purposes of discussion, the Court assumed that a "reasonable relationship" between the condition and the burden created would suffice. Furthermore, the Court stated that its decision was consistent with the approach taken by all states except for California, citing numerous development exaction cases. 109 It, therefore, does not appear that the Court intended to substantial ly alter the standard of review used by most state courts in reviewing the proportionality of development exactions. However, like awarning shot fired across the bow of the ship, the Courtin Nollan has sent a clear message to all local governments that the imposition of exactions based on inexact perceptions or simple desires will no longer be tolerated. Yet, it still appears that any impact fee ordinance which is drafted so as to satisfy the increasingly sophisticated requirements of state courts would likewise satisfy the Supreme Court's "essential nexus" test. However, the Court has specifically required that a condition to development must "substantially advance" the state'sinterestwhichjustifiesthebuildingrestriction. Therefore,ithasbeensuggestedthatNollanmay require that municipalities document the need for the development exaction with studies connecting the state's purpose to the exactions imposed.184 This was an added boost to impact fee ordinances which typically call for studies to support the fees being charged. The studies can involve determining the projected magnitude and location of growth, identifying needed facilities, segregating the costs of facilities designed to serve new growth from costs associated with correcting existing system deficiencies, and specifying service areas.1e5 In addition, the Court's indication that it will employ heightened scrutiny where a physical occupation of land is Involved could have some impact. At least one commentator has stated this may encourage local governments to adopt development fees as an alternative to land dedication exactions. f 86 As a land use exaction, fees also must withstand close scrutiny, but can arguably reflect more accurately the proportionate share of the need created.787 Finally, the Nollan decision along with other recent Supreme Court takings cases has resulted in an Executive Order dated March 15, 1988 issued by the President of the United States to allfederal agencies regarding the takings issue. The purpose of the order is to assist federal departments and agencies in reviewing their actions to avoid unnecessary takings. The Order states that the Attorney General will promulgate guidelines for the use by federal agencies to be consistent with the Nollan decision. The order sets out criteria to be followed by all agencies. One such criteria requires that when an executive department or agency requires a private party to obtain a permit in order to undertake a specific use of private property, any conditions imposed on the granting of the permit must serve the same purpose that would have been served by a prohibition of the use or action, and must substantially advance that purpose. Another criteria requires that before undertaking any proposed action regulating private property use for the protection of public health or safety, the department or agency involved must, in internal documents and any submissions to the Director of the Office of Management and Budget, identify with as much specificity as possible the public health or safety risk created by the private property use that is the subject of the proposed action, establish that the proposed action substantially advance the protection of the public health and safety against the identified risk, and establish tothe extent possible thatthe restrictions i rr~ posed on private property are not disproportionate tothe extent to which the use contributes to the risk. There are some who believe that this Executive Order clearly establishes and confirms the fact that the United States Supreme Court has indeed created a new test. This author believes that a new test has not been created but that federal agencies have been put on alert to "do their homework" whenever they exercise their "police powers". IV. REQUIREMENT OF AFFORDABLE HOUSING: LINKAGE AND INCLUSIONARY ZONING. 110 As shown above, a fairly well-developed body of case law has developed over the years setting forth the conditions under which a municipality may validly impose development exactions and impactfees. Many such exactions have been for on-site facilities and infrastructure which are easily attributable to new development, such as water and sewer facilities, roads, parks and schools. Some states have gone even further, however, and have attempted to implement affordable housing policies through exactions imposed on new development. These housing exactions have been for both on-site, as well as off-site requirements. Such exactions when coupled with the development of new commercial uses are referred to as "linkage" programs. These programs are the most recent development in the law of development exactions. Linkage programs generally require developers to contribute toward, or construct housing for, those who will purportedly come to the city because of the new construction. The rationale used by local government for imposing such requirements is that the construction of commercial or office space attracts new employees, and, therefore, engendering the need for housing.788 Linkage programs are related to, but different from, the concept of "inciusionary zoning". Inclusionary zoning refers to the practice of requiring housing developers to contribute a percentage of their projects for low- or moderate-income housing or other needs of the community.788 Linkage, in contrast, refers to the requirement that developers (of primarily commercial-business developments) contribute, either in-kind or by payment, to the construction of off-site low- ormoderate-income housing orother community needs. Few linkage or inciusionary zoning programs have been challenged to date. However, a review of these programs shows thatthey are susceptible to various legal challenges. Thefollowing is a discussion of the linkage programs which have been enacted in various cities and the legal challenges to these programs. Also discussed are legal challenges to inciusionary zoning devices. In general, these programs are subjecttothesamelegalchallengesasotherformsofexactions. Such challenges,however,appearmore likely to succeed against linkage and inciusionary zoning programs. A. Linkage Programs. Boston. The city of Boston enacted a housing linkage program in 1983. The Boston program applies to new commercial construction and rehabilitation of office, retail, institutional and educational projects of more than 100,000 square feet. The developer must pay a development impact project exaction of $5.00 per square foot for each square foot over the 100,000 foot threshold. The fee is payable to a neighborhood housingtrustfundtobeusedforthedevelopmentoflow-and moderate-income housing. Prior to enacting the ordinance, the city had conducted several planning studies, which discussed the decreasing availability of housing for low- and moderate-income people.'eo The ordinance was held invalid by the Suffolk County Superior Court, but that decision was subsequently rescinded by the Massachusetts Supreme Judicial Court on procedural grounds.181 The lower court had concluded that the Zoning Commission lacked authority to enact such an ordinance, since linkage was not a zoning power authorized by Boston's zoning enabling act. The lower court further found that the linkage program more closely resembled a tax than afee, since its primary purposewas toraise revenues to be expended for the common good.'az Even with proper authority, however, there are doubts as to whether the Boston ordinance would survive legal challenge; especially in light of Nollan. The primary problem with the ordinance is that it does not establish that the commercial development against which the exaction is levied causes a need for housing. In the absence of such a finding, it is likely that the program would be deemed an unreasonable exercise of the police power, and arbitrary and capricious acts of the city. ttt An earlier inclusionary program in a suburb of Boston had also been held to lack statutory authorization. In MirirliocoY & 8aston Street Railway Company v Board of Aldermen of Newton,1°3 the Supreme Judicial Court of Massachusetts held that a condition requiring a landowner to lease several apartments to the city housing authority at reduced rents for rental by the authority to low-income and elderly persons was invalid. The condition was imposed by the Board of Aldermen under an ordinance which provided that the board may attach such conditions to a permit as may be necessary to protect the neighborhood. The court held that the board was not authorized to impose the condition under the city's home rule powers, since the state had occupied the field of zoning by enacting the Zoning Enabling Act, and because any power granted to the city under the Home Rule Amendment could be exercised only through the adoption of local ordinances, which was not done. Because the court found the board lacked authority to impose the condition, it did not reach the issue of whether the condition was constitutionally permissible. San Francisco. San Francisco has adopted a linkage program which has not yet been challenged in court. The Office Affordability Housing Production Program applies to office developments of 50,000 square feet or more. The Program requires developers either to construct or rehabilitate low *-and moderate-income housing or to pay a fee in lieu thereof of $5.34 per square foot of office space.18O San Francisco has also enacted ordinances requiring developers to pay fees for public art, open space, child care, transit and hotel conversion.185 ACatifornia court upheld a different housing linkage program in Terminal Plaza Corporation v City San Francisco.7B° In that case, the city enacted an ordinance restricting the conversion of residential hotels to hotel or other uses in order to alleviate a shortage of low-income residential units. In order to obtain a permit for conversion of a hotel, the developer had to either construct replacement units, rehabilitate an equal number of units, or pay a fee to the city's Residential Hotel Preservation Fund. The Court of Appeals upheld the ordinance against due process and equal protection chal lenges, concluding that the ordinance served a legitimate public interest, and did so by means reasonably and directly related to its goals.187 The court further held that the ordinance did not constitute a taking, since there was no showing that the plaintiff's investment backed expectations had been compromised.19B The California court also upheld a transit fee linkage ordinance as a permissible use of the City's police powers in Ruac Ruildina Partnership v. San Francisco.78° The transit fee ordinance requires developers of downtown office space to pay $5.00 per square foot of office space as a condition to occupancy. The fee Is used to accommodate the new riders generated by the new development. The court held that the measurewas not a tax, since itwas levied for the voluntary privilege of developing real property, and was tied to the increased ridership that would result from the development. It also rejected a claim that the ordinance violated equal protection laws since it did not impose a similar fee against retail developers. The court rejected this argument, holding that the measure was within the City's police power, and that there was a rational basisfor distinguishing between retail and office development. The court also rejected due process and takings claims, finding that the ordinancewas rationally related to a legitimate govern;,iental interest. The extent to which the Nollan case will change the standard under which the California courts examine such measures remains to be seen. Seattle. The city of Seattle enacted an ordinance similar to the one upheld in Terminal Plaza Corporation, supra, entitled the Housing Preservation Ordinance, in 1985.200 The ordinance requ fired that in order to demolish low income housing or convert such property to non-residential use, the owner was required to relocate the current tenants at the owner's expense, and to replace a percentage of the low-income housing with other suitable housing. The ordinance was recently struck down as an unauthorized tax in San Telmo As~nriates v Citv of Seattle.2p7 The court reasoned that the payment in-kind or of fees was not used to 712 regulate the demolition of housing, but to provide housing to a segment of the population. The court noted that the Clt~r was shifting the responsibility of providing such housing to a limited segment of the population. 02 Since the primary purpose of the housing ordinance was to accomplish public benefits, rather than to regulate, it was a tax. Since such a tax was not authorized, it was struck down. Other cities. The city of Miami adopted a linkage ordinance in t 983. The ordinance allows a commercial developer to increase his floor area ratio if he contributes $4.00 or constructs a specified amount of affordable housing for each square foot of added space or constructs affordable housing. This ordinance has been criticized since it conditions development on one's ability to pay rather than the appropriateness of aparticular land use at a particular location.zo3 Other cities, including Denver, Stamford, Connecticut, Chicago, Kansas Cit~ Washington, D.C., and Hartford, Connecticut are also considering implementing linkage programs.z ° There has been some question as to whether linkage programs can satisfy the "rational nexus" test.zos Obviously, the strength of the causal connection between the new development and the housing requirement will vary from case to case. In order to support such a program, a municipality will have to establish that the proposed commercial development causes a shortage of necessary housing, and that the costs of the new housing are sufficiently attributable to the need created by the development.zoa An even more difficult case is presented when a municipality attempts to impose fees or the dedication of housing as a condition to new residential developments. Any such measure would be very likely to fail under traditional standards of reviewing development exactions, since it would be difficult to establish that the construction of residential units creates a need for additional affordable housing units. However, as discussed below, Inclusionary zoning ordinances, which require that a portion of a new residential development consist of low- and moderate-income housing to promote racial or economic Integration of a community, may present an exception to this case. In the absence of a finding of racial discrimination, total economic exclusion or some equally overriding public policy, such inclusionary zoning measures would be found legally deficient. B. Inclusionar oninp. Some municipalities have adopted mandatory inclusionary zoning ordinances, which require residential developments over a minimum size to include units for sale or rental to low- or moderate-Income households. The ordinances typically require the developer to set aside between ten and twenty percent of the dwelling unitsfor such housing units.zO7 There are veryfew cases considering such measures, and the extent to which states and/or municipalities may authorize or mandate such measures is not clear. Such ordinances present a number of legal problems.zoa The Virginia Supreme Court struck down an inclusionary zoning ordinance in Board of Supervisors v. DeGroff Enterprises. Inc.,20B with little discussion. The court acknowledged that provision of low- and moderate-income housing was a legitimate public purpose. However, the court concluded that the ordinance exceeded the authority granted by the zoning enabling act, since the purpose of zoning is limited to preserving the character of an area and regulating the uses of land. The purpose of the ordinance in question, in contrast, was to achieve a "socio-economic" goal. The court also found thatthere was a taking of property because the developer could not sell or rent the dwellings at prices fixed by the free market. The DeGroff decision has been criticized as to its holding that there was a taking of property where the developer could still make a reasonable return on his investment.270 In addition, the holding that the ordinance was ultra vires because it dedlt with "socio-economic" matters rather than purely 113 physical zoning has been called "patently absurd".Z" In contrast, the New Jersey Supreme Court has upheld an inclusionary housing requirement. The New Jersey Supreme Court's willingness to allow such a requirement is an outgrowth of its rulings on exclusionary zoning,beginningwithSo~~thernBurlingtonCountyNAACPv TownshiRgfMr Laurel2 z(Mt. Laurel I). In Mount Laurel I, the plaintiffs challenged a zoning ordinance in a New Jersey suburb, which contained a number of provisions which had the effect of excluding low and moderate income housing. These incl uded excessive zoning for industrial use and extensive low-density residential zoning. The court invalidated the zoning ordinance, concluding that municipalities in New Jersey must meet their "fair share" of the present and prospective need for low and moderate-income housing. After the ordinance was amended on remand, the New Jersey Supreme Court again reviewed the ordinance in G~~rthe~rn Burlington Count~NAACP v Township of Mr Laurel213 (Mt. Laurel II). In a very lengthy opinion, the Mount Laurel I I court set forth the means by which it could be ensured, to the extent possible, that each municipality provides a "realistic opportunity" for construction of low-income housing through its zoning ordinances. The court included a discussion of inclusionary zoning devices, noting that in some cases, affirmative action might be required: Therefore, unless removal of restrictive barriers will, without more, afford a realistic opportunity for the construction of the municipality's fair share of the region's lower income housing need, affirmative measures will be required.214 We hold that where the Mount Laurel obligation cannot be satisfied by removal of restrictive barriers, inclusionary devices such as density bonuses and mandatory set-asides keyed to the construction of lower income housing, are constitutional and within the zoning power of a munlcipality.zrz Based in part on this decision, the New Jersey Supreme Courtin In re Egg Harbor Associates,216 upheld a condition imposed by a state agency on the issuance of a coastal zone permit that the developer set aside twenty percent of its housing for low and moderate income housing. The project in question wasfor 1,530 housing units, a 500 room hotel, and 300 slip marina, and a 22-story office building. The court held that the condition was impliedly authorized by the coastal zone legislation. The statute in question authorized the regulation of land use for the general welfare, including "the power to create housing opportunities." The court also noted that mandatory set-asides for inclusionary zoning had previously been approved by it in Mount Laurel II. The court further noted that the agency had explained in its decision that the need for low and moderate income housing was a direct result of casino development. The court also rejected a challenge that the requirement constituted a taking. The court recognized that the measure would be a taking if it did not permit "an economically efficient operator to obtain a'just and reasonable' return on his investment". However, because the developer had not presented any evidence on this issue, the courtfound that he had not sustained the burden of proving that a taking had occurred. Whether such inclusionary zoning measures will be upheld in other jurisdictions may depend upon that jurisdiction's experience and policy toward racial and economic integration of its communities. It would appear, however, that such inclusionary zoning measures could be subjected to challenge on several grounds. Such measures could be deemed to effectatakingsonthegroundthattheydonot"substantially advance" a legitimate zoning purpose. A takings analysis would also examine the extent to which the requirement affects the developer's investment-backed expectations, which could depend on the effect on the profitability of the development, and other incentives given to the landowner to offset any losses, such as density bonuses or relaxing of other development requirements. 114 Inclusionary zoning measures could also be challenged as a violation of due process and as lacking statutory authority on the ground that they do not serve a legitimate zoning purpose. The extent to which such challenges will be successful, however, remains to be seen. V. GUIDELINES FOR DRAFTING A DEFENSIBLE IMPACT FEE ORDINANCE. The following are guidelineswhich should be followed in drafting an impactfee ordinance, to best assure the validity of the ordinance from legal challenge based on state court decision in other jurisdiction and the Nollan decision. 1. Incorporation of Comprehensive Plans and Capital Improvement Plans. The ordinance should show a need for impact fees by relating the expenditure of the impact fees within the context of a capital improvement plan. The capital Improvement plan should also be related to a community wide development plan.Z" The ordinance must demonstrate that the need for additional facilities is required by new development, and not by existing deficiencies. This can be accomplished through determination of appropriate facilities standards, and formulation of a capital Improvement plan to schedule improvements that will correct existing deficiencies, upgrade service levels, and accommodate new development. The cost of additional facilities must then be apportioned between new and existing development.Z'e 2. Fees Must be Proportional to the Need Created. The ordinance must establish the prozportionate share of costs that the new development will bear. The factors which may be considered are: 1e a. the cost of existing facilities; b. the means by which existing facilities have been financed; c. the extent to which new development has already contributed, through tax assessments, to the cost of providing existing excess capacity; d. the extent to which new development will, in the future, contribute to the cost of constructing currently existing facilities used by everyone in the community or by people who do not occupy the new development (by paying taxes In the future to pay off bonds used to build those facilities In the past); e. the extent to which the newly developed properties are entitled to a credit for providing facilities that the community has provided in the past without charge to other developments In the service area; f. extraordinary costs, if any, in serving the new development; and g. the time-price differential inherent in fair comparisons of amounts paid at differenttimes. The computation of the fee will vary depending on the improvement for which the fee is assessed and the financial restraints in the communlty.Z ° 3. Avoidance of Double Payment. The factors al~pve should assure that new development does not pay for facilities twice i.e., once through impact fees bnd later through taxes or vice versa. In addition, the 115 ordinance should take into consideration other forms of exactions which may be imzposed on the development, such as subdivision exactions or earlier in the zoning unilateral agreement. 21 4. ('reation of a Separate Fund. The funds should be earmarked and placed into a separatefund designed for the improvement(s) for which they were collected. 5. Facc Must be Spent to Benefit the Development. The improvement should be located where one may reasonably expect that occupants of the new development would use the Improvements. However, the improvements need not be for the exclusive use of the occupants of the new development. Palm Beach County, Florida resolves this problem by requiring that road impact fees be spent within six miles of the new development. Montgomery County and Maryland, establishes districtswithinwhichroadimpactfees must be spent.zzz 6. Fo ~ st be Spent Within a Reasonable Time or Refunded. The ordinance should address the timing of the expenditure, since courts will require that impact fees be spent within a reasonable time (e.g., 4 to 6 years from collection). Some ordinances delay collection of the fee to give more time to consolidate collection efforts for major capital improvement projects. Many impact fee ordinances in Florida also contain a refund provision, under which fZZ ds which are not expended within a specified time are refunded to the current occupant of the property. 7. nno h 'sm to Challenge the Fee and Exemptions. The ordinance should allow those who pay the fee to challenge the criteria on which the fee is based. This may be accomplished through a hearing or appeals procedure which would allow developers to present their own studies and data to support a lesser fee amount.z2~ The ordinance should contain a hardship waiver provision for those cases where assessment of the fee would leave the developer with no economically viable use of his property. Exemptions should be provided and based on non-economic criteria. 8. Fzy~~al Application. The ordinance should assessfees on every development that creates a need for the infrastructure similarly. Both small and large developments should be assessed fees.zze g. Fao~ Should Onlv be Usedfor Construction. The fees should be used only for consVUCtion of facilities, and not for the maintenance, repair or operation of the facilities once constructed. Taxes or user fees should be utilized to cover the cost of these latter items. 10. Time of Payment. The time of payment of the fee should be considered. Atypical scenario is to provide for the payment of the fee when the building permit is issued or at subdivision approval. 11. Doroimentation of State Interest. Finally, in response to the Nollan case, local governments should establish that the exaction substantially advances a legitimate state interest. This can be done through a recital in the preamble of the ordinance to this effect and a finding by the legislative body that this is so based on the State Constitution or prevailing state laws. VI. IMPACT FEES IN HAWAII A. Authori to Impose Impact Fees. In Hawaii, local government power is exercised by the counties.z2B The individual counties in Hawaii derive their authority to regulate from two major sources: 1) the grant of "home rule' power under the Hawaii constitution; and 2) general state laws which grant the counties the power to regulate for specific purposes. 116 1. County Home Rule. The Hawaii counties were granted "home rule" power by constitutional amendment in 1968.227 Article VI I I, Section 2 of the Hawaii Constitution provides that: Each political subdivision shall have the power to frame and adopt a charter for Its own self-government within such limits and under such procedures as may lie provided by general law. Such procedures, however, shall not require the approval of a charter by a legislative body. Charter provisions with respect to a political subdivision's executive legislative and administrative structure andorganization shall be superiorto statutory provisions, subject to the authority of the legislature to enact general laws allocating and reallocating powers and functions. Thus, Article VIII of the Hawaii Constitution grants to the counties the power toadopt ahome-rule charter for their own government.22B By adopting a charter, the counties establish their power and authority over matters of county concern.228 For example, the Revised Charter of the City and County of Honolulu2so provides: The city shall have and may exercise all powers necessary for local self-government and any additional powers and authority which have been or may be hereafter granted to it, subject only to the general laws of this State allocating and reallocating powers and functions pursuant to Article VIII, Section 2 of the Constitution of the State of Hawaii. The enumeration of express powers in this charter shall not be exclusive. In addition to these enumerated express powers and those implied thereby, the city shall have and may exercise all powers it would be competent for this charter to enumerate expressly. The charters of the other counties contain similar provlsions.231 The power of the counties of the State of Hawaii under their respective charters is very broad. However, as in other states, many of the areas which the counties may regulate under their home rule powers remain subject to legislative control to the extent that state law conflicts with county law.2a2 The Hawaii Supreme Court has explained: "(t]he constitutional amendments made to article VII [now article VIII], on local government,~ranted to political subdivisions only limited freedom from legislative control, not complete home rule."2 s In Ciri & County of Honolulu v. Ariyoshi,234 the court explained that provisions of a charter or ordinance of a political subdivision of the state will be held superior to legislative enactments only ff the charter provisions relate to a county government's executive, legislative or administrative structure and organization.zss Furthermore, Article VIII, Section 6 of the Hawaii Constitution expressly provides "[t]his article [Local Government] shall not limit the power of the legislature to enact laws of statewide concern." The court held that county home rule power did not~rohibit the state from enacting a statute prohibiting salaryincreasestocountyofficersandemployees.2 ° Thecourtfoundthatthiswasamatterofstatewide concern, since the legislative history of the act reflected that the law was designed to alleviate the lack of an equitable, reasonable and integrated salary structure for all public employees.29z Thus, while the power granted to the counties under home rule is broad, this power is subject to legislative control with respect to matters of statewide concern and shared county and statewide concern.29B As explained above, other states have construed land use regulations as being a matter of shared county and statewide concern.23B As discussed above, courts in other states havg held that similar home rule Bowers confer authority on municipal governments to impose development exactions and impact fees. ~0 It would appear that in 117 Hawaii, likewise, unless state legislation conflicts with such measures, the home rule power of the counties may provide a source of power to enact such ordinances. It has been suggested, however, that because the Constitution gives the legislature specific authority to confer powers on the counties by general law, it is possible to argue either that the counties have only those land use powers delegated to them under the state enabling legislation, or that they have independent powers to do sounder their home-rule powers.z'r 2. State Enabling Statutes. In addition to "home rule" authority, Chapter 46 of the Hawaii Revised Statutes sets forth the power and authority common to all the counties. Chapter 46 specifically grants to the counties the authority to establish county zoning regulations.zO2 According to Section 46-4 of the Hawall Revised Statutes "[z]oning in all counties shall be accomplished within the framework of a long range, comprehensive general plan prepared or being prepared to guide the overall future development of the county."zf3 The counties are also given limited powers to impose taxes. Chapters 246, 248 and 249 grant specific authority to the Individual counties to establish and collect real property and vehicular taxes?'O The Hawaii Revised Statutes also contain numerous enabling statutes similar to those which have been held in other states to grant municipalities authority to require exactions and Impact fees as a condition of development. For example: Countyaonina: H.R.S. Sec. 46-4 grants the county zoning powers, including the power to prescribe such rules, regulations, administrative procedures, and personnel as it may deem necessary for the enforcement of its zoning powers. The zoning power granted under the statute must be exercised by ordinance which may relate, inter ells, to (7) the location of roads, schools, and recreation areas; and (12) other such regulations as may be deemed by the boards or city council as necessary and proper to permit and encourage orderly development of land resources within their jurisdictions. PlanninpandTrafficCommisslons: H.R.S.Sec.46-5 authorizes any county withapopulationless than 100,000 persons to create a county planning commission to formulate a master plan for future growth and development, to formulate subdivision and zoning regulations, and recommend the establishment of building zones. Parks and Playgrounds for Subdivisions: H.R.S. Sec. 46-6 permits each county to adopt ordinances to require a subdivider, as a condition to approval of a subdivision to provide land in perpetuity, dedicate land for park and playground purposes or pay an equivalent sum of money. c"Pneral Powers of County Officers: H.R.S. Sec. 62-34(7) provides that the counties have the power to "regulate and require the ...laying of water and sewer mains in subdivisions of land before the lots in the subdivision are offered for sale or sold and to prescribe the conditions under which the mains shall be laid . . H.R.S. Sec. 62-34(7) provides that the counties have the power to "regulate and require the construction of roads in subdivisions of land before the lots in the subdivisions are offered for sale or sold Pnwars of Hawaii. Kauai and Maul County: 118 H.R.S. Sec. 61-2(3) provides the counties with the power to "establish and maintain water works and sewer works ...and to enlarge, develop, and improve the same". H.R.S. Sec. 61-2(3) provides the counties with the power to "open, construct, maintain, and close up public streets, highways, roads ...within Its boundaries". Similar enabling provisions existfor solid waste disposal,2`5 police andfire,zOB and affordable housing.Z" Additional authority to impose some forms of exactions or impact fees may be found in Chapter 205A, where special management area permits are required for development. Section 205A-26(1) H.R.S. provides that all development in the special management area shall be subject to reasonable terms and conditions set by the county authority to accomplish certain specified aims, and that the county authority shall seek to minimize various impacts. To the extent that a fee or dedication requirement advances one of these specified purposes, it is possible that Chapter 205A could also be deemed to confer authority on the counties to impose such requirements. Thus, it appears that, at least in Hawaii, there is sufficient enabling legislation to confer authority on the counties to require development exactions and impact fees for many kinds of infrastructure. B. Use of Development Exactions in Hawaii. The imposition of various kinds of development exactions is common in Hawaii. Development exactions are imposed not only through the zoning process, but also through other county and state permits and approvals. Pursuant to the specific authority conferred on the counties in H.R.S. Sec. 46-6, all of the counties provide in their zoning ordinances for the dedication of parks and playgrounds, or the payment of fees in Ileu of such dedication.2`B Other types of exactions frequently imposed locally include the provision of streets, drainage, traffic or transportation improvements, child care facilities, affordable housing, and job training facilities. With the exception of parks and playgrounds, the dedication of such infrastructure is not specifically authorized by statute, and is not currently provided for in the county ordinances. To date, there has not been any challenge to the ability of the counties to impose development exactions, either pursuant to an ordinance or otherwise. It is not uncommon in Hawaii that state and countyexactions include, particularly Inhotel-resort projects, a provision for employee housing. This is especially true for new resort projects being constructed in isolated areas of the islands where the main population base i.e., source of labor, is situated several miles away. In some situations, the resort's labor pool is imported from outside the state and causes an in-migration problem by exhausting existing suppliesofrentalhousingintheimmediatearea. The stateandcountieshaverecognizedthisproblemand sought to deal with it by imposing employee housing requirements on these type of rent projects. The State, in addition, through Chapter 205, H.R.S., authorizes the State Land Use Commission to require infrastructure and housing conditions as part of their reclassification approval process. The Commission, for instance, must consider the impacts of a proposed reclassification on employment opportunities, economic development, natural resources and affordable housing opportunities in the area. a. Maui County. An impact fee for traffic and roadway improvements in West Maui has been proposed and is presently under consideration.Z`B The intent of the Maul ordinance is to recover a portion of the governmental expenditures related to growth by imposing a pro rata fee upon landowners and developers who directly contribute to expandin~ the population and increasing economic activity in the area through new land development activities. 50 The fee is assessed against all new land development activities which create a need for additional roadway capacltles.zsr The County is required to establish a West Maui Transportation Plan which must conform to the Lahaina 119 i Community Plan and include: 1. A Transportation Planning Model designed to provide a fair and equitable method of sharing the growth-related costs of providing for roadway improvements, and to form the basis for a roadway master plan. The model is to be updated every five years. 2. A Base Year Road Network System designed to accommodate the traffic demand for the base year at a predetermined quality of operation. The system is to be reviewed annualy. 3. A Roadway Master Plan which is to establish an operatin~ roadway capacity on all major roads within the West Maui Region. The plan is to be reviewed annually. 6P The fee Is based on the impact of new development, overcapacity, and the existence of roadway improvements planned for and included in the Master Plan Improvements for West Maui. The Department of Finance is to assess and collect the impact fee from an applicant upon issuance of a building permit or final residential subdivision approvai.269 Fees wil l be deposited into the West Maui Roadway Improvement Fund and will be used exclusivelyfor traffic and roadway Improvements In the West Maui region.TS~ The Department of Finance Is to retain two percent of the total funds collected to offset administrative costs.266 An applicant may challenge an im~actfee byrequesting a hearing and providing the PlanningCommission with an independenttraffic study. 6° Additionally, fees must be refunded if notspentor encumberedwithin six years from the date the fees were paid.zb7 Finally, credit will be available to a developer who elects to construct part of the road network system or Increases roadway capacity through transportation management systems, subject to approval by the Department of Finance, Department of Planning, and Department of Public Works.268 II MauiCountyhasalsoado~tedguidelinestothePlanningCommissionforemployeehousingrequirements for hotel developments.z ° The guidelines setforth a policy that housing units be constructed, developed or provided by a hotel developer and be made available for hotel employees at the time the hotel commences Its operation.200 The desired ratio is one housing unit for every six apartment-hotel, hotel, or motel units or rooms that contain more than twenty units or rooms.261 The Department of Planning and Departmentof Human Concerns must developwritten guidelines to administer the provisionswith respect to a housing needs assessment determinatlon.z°z b. Hawaii Countv. An Impact Fee Code has been proposed for Hawaii county.zB9 This ordinance deals with publicly-levied fees designed to help defray the costs ofdevelopment-generated public facilities for water, sewer, roads, parks, housing, and landfills. The ordinance attempts to apply "rational nexus" reasoning to Insure that new developments contribute their fair share of the costs of new or Improved public facilities.zQf The ordinance would apply to all new development generating a need for capital facilities, with certain listed exemptions.zQb An applicant has the option of having the impactfee computed by an independent impact analysis at the cost of the applicant, which is to be approved by the appropriate department.zQ6 All fees will be placed in separate trust accounts for each impact district. The Director of Finance will be responsible for keeping an adequate accounting of each account.267 Fees must be spent solely for the purposes specified for funds of each account.268 It is intended that any funds not expended or encumbered within a specffed number of years are to be returned with interest. However, the time limit for each type of fund and interest rate are not stated2Q8 The ordinance also allows for credit to the extent the developer makes capital improvements or dedications. However, no credltwill be allowed for on-site improvements or improvements made adjacent to the development which are required by existing code 2n z~2 2~s z» provisions.27O The proposed ordinance~rovideforimpactfeesforwater, sewer, road, park, police and fire 276 affordable housing,z ° and sanitary landfill/solid waste.27 120 Calculation of each fee is to be based on a future study of each area. The fee calculation will be made by various county agencies and the method for calculating each fee has not been determined. Most of the fees can be offset by a five percent discount designed to encourage the use of the schedule and reduce the administrative time for processing independent impactanalyses. In addition, thefee scheduleswill be adjusted for inflation annually based upon the percentage increase in the Consumer Price Index. Finally, payment of the fees is made to the Director of Finance prior to the issuance of any building permit with the exception of subdivisions of land for single family dwelling which shall be paid prior to final subdivision approval. c. Kauai County. An Environmental Impact Assessment on Land Development was passed by the Hawaii County Council on July 29, 1980.278 This is a special, nonrecurring fee assessed upon each new subdivision and each new hotel, motel, multi-family dwelling, commercial and industrial facllitywithin the County. The measure was passed to resolve significant adverse effects on water, land, and air, and fiscal burdens on existing public facilities which are created by new development.27B Payment is due at the time of the issuance of the building permit, with the exception of subdivisions of land for single-family dwellings, for which payment is due prior to final subdivision approval.280 The ordinance specifies the type of development upon which fees should and should not be assessed.287 All fees are paid into a trust fund accountwith no credit given for Improvements required to be provided pursuant to condition Imposed by zoning ordinances.zez d. City and County of Honolulu. The Department of Land Utilization, City and County of Honolulu, in 1986 introduced Biil No. 194, which proposed a Community Benefit Assessment ("CBA") impact fee program. The CBA Bill (Draft No. 2) imposes an impact fee on development projects which receive a change in zoning to a higher intensity of use. The fee is based on a consolidation of all conditions or requirements of the development project over and above those pertaining to on-site infrastructure improvements and improvements mandated by state or county laws. Projects which involve 25 or less residential dwelling units are exempt, as well as, those projects situated in other zoning districts which involve 25,000 square feet of floor area or less. The Bill provides that all fees collected must be used within the project or region affected by the zone change as identified by the City Council. The developer is required to prepare an analysts of community impacts caused by the developmenton the surrounding area based on guidelines promulgated by the Department of .Land Utilization. The Impacts include such things as public facilities improvements, off-site infrastructure,jobs,etc. This report, which is similar to an environmental assessmentorimpactstatement, is to be made a part of the rezoning application. The Bill further provides that the fee shall be determined through a formula which takes into consideration the particular zone change, land values and location of the affected parcel and movement of the economy over time. Location and zoning factors are set forth in the Bill and are an integral part of the formula. These factors are reviewed every five years by the City Department of Finance. The developer is able to receive credits against the fee by providing affordable housing or rental units. As part of the fee collection provisions, the CBA Bill requires that a lien be placed on the land being rezoned and will be removed only after the CBA fee is satisfied. In addition, if the property is subsequently rezoned, an additional CBA fee could be assessed against the property. The CBA proposal as described above mays be subject to legal challenge on both the "nexus" and "proportionality" aspects of the fee calculation. It is not clear from the formula how the need for any 121 particular type of capital improvement (the Bill does not limit itseN to specific types of improvements, but rather, permits the fees to be used for any type of public facility or service) is made part of the fee determination. Unless an overall study were done first to substantiate the needs for different types of public facilities and improvements on an island-wide basis, the location factors and zoning factors seem somewhatarbitrarilyhased. In regard to proportionality, it is again difficult to contemplate how the formula allocates the fees required for specific capital improvements from one development to another in relationship to the needs being created by new development for such capital facilities. At this date, the CBA BIII is presently being reviewed by the City Council's Zoning Committee and action is expected to be taken on the measure sometime late this year. VII. SUMMARY It is evident that a solution must be found to meet the pressing needs of our island communities to accommodate growth. The inability of our state and local governments to provide public services and facilities made necessary by new development has set the stage for impact fees. Impactfees, like any land use concept will only be as effective a tool for government and the private sector alike as we desire it to be. The unfairness resulting from the ad hoc exaction process, the resulting unpredictability of private sector burdens has been the major impetus for impact fee legislation across the country. Impact fees provide a vehicle in which predictability and fairness can be achieved. However, like any tool, it can be used properly or abused. The responsible use of impact fees by the public and private sectors will make our community a better place to Ilve. Impact fees provide only one solution to the many problems facing us, but it is a step in the right direction. 122 Footnotes to Text The author gratefully acknowledges both Pamela J. Larson and Donna Y. Kanemaru, associate attorneys at Kobayashi, Watanabe, Sugita, Kawashima & Goda, for their valuable assistance in the research and writing of this chapter. 1. U.S. Const. amend. X (The powers not delegated to the United States by the Constitution, nor prohibited by It to the states, are reserved to the States respectively, or to the people); See also, McCullock v. Maryland, 17 U.S. (4 Wheat.) 316 (1819). 2. 1 Rathkopf, The Law of Zoning and Planning 2-2 (1987). 3. Matter of Heftel Broadcasting Honolulu, Inc., 57 Hawaii 175, 554 P.2d 242 (1976), cert. denied, Heftel Broadcasting Honolulu, Inc. v. Wong, 429 U.S. 1073, 97 S.Ct. 811, 50 L.Ed.2d 791 (basic test of state power to tax Is whether the tax bears some reasonable relationship to the protection, opportunities, and benefits given by the state); Matter of AlohaAirlines, Inc., 65 Hawaii 1, 647 P.2d 263 (1982).; Robbins-Leavenworth Floor covering, Inc. v. Leavenworth Nat. Bank &TrustCo., 229 Kan. 511, 625 P.2d 494 (1981). 4. Berman v. Parker, 348 U.S. 26, 75 S.Ct. 98, 99 L.Ed. 27 (1954); see also, Charles River Bridge v. Warren Bridge Co., 36 U.S. (11 Pet.) 420 (1837). 5. Rathkopf, supra note 2 at 2-7. 6. 7. 1~. at 2-9. 8. at 2-9, 2-10. 9. See generally 4 Antieau, County Law Sec. 31.05 (1987); ~f. City of Greenwood Village on Behalf of State v. Fleming, 643 P.2d 511 (Colo. 1982); Dempsey v. City & County of Denver, 649 P.2d 726 (Colo.App. 1982). 10. 4 Antieau, County Law Sec. 31A.05 at 31A-10 (1987). 11. Mandelker, Land Use Law 82-83 (1982). 12. 1~. 13. Fla. Const. Art. VIII Sec. 2(b). 14. Mandelker, supra note 11 at 82-83. 15. Imo. 16. 123 17. 4 Antieau, County Law Sec. 31A.04 (1987). 18. I~. at Sec. 31 A.04, 05. 19. See e.°• Cupp v. Board of Sup'v. of Fairfax County, 227 Va. 580, 318 S.E.2d 407 (1984) is tins Hylton v. Prince William County, 220 Va. 435, 258 S.E.2d 577 (1979). 20. 195 Cal. 477, 484, 234 P.2d 381, 383 (1925). 21. Hadacheck v. Sebastian, 239 U.S. 394, 36 S.Ct. 143, 60 L.Ed. 348 (1915)(prohibition of a brick factory in a residential area); Goldblatt v. Town of Hempstead, 369 U.S. 590, 82 S.Ct. 987, 8 L.Ed.2d 130 (1962)(prohibition of a gravel mining operation in a residential area). See also, Snyder and Stegman, Patina for Growth• Using_Develooment Fees to Finance Infrastructure at 5 (ULI 1986). 22. 272 U.S. 365, 387, 388, 47 S.Ct. 114, 118, 71 L.Ed. 303 (1926). 23. Snyder and Stegman, supra note 21 at 5. 24. Jsl. at 6. 25. 30 N.Y.2d 359, 285 N.E.2d 291 (N.Y. 1972). 26. 1~. at 303. 27. Snyder and Stegman, supra note 21 at 6. 28. 29. Bauman and Ethier, ~a_ _vclopment Exactions and Imnact Fees A Survey of American Practices, 50 Law and Contemp. Prob., No. 1 at 51 (1987). 30. at 51-52. 31. I~. at 52. 32. at 52. 33. Richards and Merriam, ~ and Dedications In Lieu Fees and Imnact Fees: When Are They Leaal?, Impact Fees: A Developer's Manual, Appendix D at 509. 34. Mandelker, supra note 11 at Sec. 9.14. 35. Imo. 36. Richards and Merriam, supra note 33 at 509. 37. _ U.S. 107 S.Ct. 3141, 97 L.Ed.2d 677 (1987). 124 38. See generally Morgan, Duncan, and McClendon, Drafting Impact Fee Ordinances: Legal Foundation for Exactions, Zoning and Plan. L. Rep., Vol. 9, No. 7 at 50 (July-August 1986). Special assessments are charges levied against real property partlculariy and directly benefited by an improvement in order to pay for the improvement. 39. Imo. at 50, i in Home Builders 8 Contractors Assn. of Palm Beach County, Inc. v. Board of County Commis of Palm Beach County, 446 So. 2d 140 (Fia. Dist. Ct. App. 1983); Hillis Homes, Inc. v. Snohomish County, 650 P.2d 193 (Wash. 1982). 40. Morgan, Duncan, and McClendon, supra note 38 at 50. 41. 391 Mass. 415, 462 N.E.2d 1098 (1983). 42. Jsd. at Westlaw 13. 43. at Westlaw 15. 44. 433 So.2d 574 (Fla. Dist. Ct. App. 1983). 45. I~. at 576. 46. Morgan, Duncan, and McClendon, 6uora note 38 at 51. 47. $gg Stroud ~ opal Considerations of Development Imnact Fees, J. A.P.A. at 31 (Winter 1988) 48. III. Const. Art. VII, Sec. 6(a). 49. 41 III. App. 3d 334, 354 N.E.2d 489 (1976), ii~d. 68111.2d 352, 369 N.E.2d 892 (1977). 50. Fla. Const. Art. VIII Sec. 2(b). 51. 329 So.2d 314 (Fla. 1976). 52. Fla. Const. Art. VIII, sect. 1(g). 53. 431 So.2d 606 (Fla. Dist. Ct. App.), cert denied, 440 So.2d 352 (1983). 54. !S!. at 609. 55. at 610. 56. Wyo. Const. Art. 13, Sec. 1(b). 57. 662 P.2d 888 (Wyo. 1983). 58. at 895, citing Larramie Citizens for Good Government v. City of Larramie, 617 P.2d 474 (Wyo. 1980). 59. 662 P.2d 888 (Wyo. 1983). 60. at 896-897. 125 61. I~. at 900. 62. I~. at 903. 63. Fla. Stat. Sec. 125.01(I),(m), & (w)(1981). 64. 446 So.2d 140 (Fla. Dist. Ct. App. 1983). 65. City of Arvada v. City and County of Denver, 663P.2d611 (Colo. 7983)(watersystemdevelopment fee upheld). 66. Amherst Builders Association v. City of Amherst, 61 Ohio St.2d 345, 402 N.E. 2d 1181 (Ohio 1980)(sewage connection fee upheld). 67. Jenad, Inc. v. Village of Scarsdale, 18 N.Y.2d 78, 218 N.E.2d 673)(requirement of dedication of land for park purposes or fee in-lieu thereof upheld). 68. Jordan v. Village of Menomonee Falls, 137 N.W.2d 442 (Wisc. 1966)(requirement of dedication of land for school, park or recreational sites, or fee in-lieu thereof, as a condition of subdivision approval upheld). 69. 606 P.2d 217 (Utah 1979). 70. at 219. 71. I~. See also Rupp v. Grantsville City, 610 P.2d 338 (Utah 1980)(upholding water and sewer connection fees). 72. 413 Mich. 505, 322 N.W.2d 702 (Mich. 1982). 73. 59 N.Y.2d 385, 465 N.Y.S.2d 865, 452 N.E.2d 1193 (N.Y. 1983). 74. 108 N.J. 223, 528 A.2d 555 (N.J.1987). 75. I~. at Westlaw 5; N.J.S.A. 40:55D-42. 76. I~. at Westlaw t0. 77. Id. at Westlaw 10 and 11. 78. Beaver Meadows v. Board of County Commissioners, 709 P.2d 928 (Colo. 1985). 79. Stroud, supra note 47 at 31. 80. Bosselman and Stroud, Legal Aspects of Development Exactions, Development Exactions, published by American Planning Association at 76 (1987). 81. Lillydahl, Nelson, Ramis, Rivasplate, Schell, ThP Nand For a Standard State Impact Fee Enabling /fit, J. A.P.A., Vol. 54, No. 1 at 7 (Winter 1988). 82. I~. 126 83. S, ee, 4.y., Hollywood v. Broward County, 431 S.2d 606 (Fla. Dist. Ct. App. 1983). 84. Mandelker, supra note 11 at 36-37. 85. Mandelker, supra note 11 at 41. It should be noted that if a "suspect" classification or fundamental right is involved, the court will apply the more rigorous strict scrutiny standard of review. 86. 716 F.2d 646 (9th Cir. 1983). 87. I~. at 654-55. 88. Armstrong v. United States, 364 U.S. 40, 49, 80 S.Ct. 1563, 4 L.Ed.2d 1554, 1561 (1960); see also Penn Central Transportation Co. v. New York City, 438 U.S. 104, 123, 98 S.Ct. 2646, 57 L.Ed.2d 631, 648 (1978). 89. Pennsylvania Coal v. Mahon, 260 U.S. 393, 43 S.Ct. 158, 67 L.Ed. 322 (1922) quoting Justice Holmes opinion "The general rule at least is, that while property may be regulated to a certin extent, if regulation goes too far it wil be recognized as a taking." 90. 438 U.S. 104, 124, 98 S.Ct. 2646, 57 L.Ed.2d 631, 648 (1978). See also, Babcock and Siemon, The Zoning Game Revisited, Lincoln Land Institute of Land Policy, at 59-75 (1983). 91. Seed ne eral lv, Mandelker, SUDrg note 11 at 15-36; Brower and Godschalk, Constitution and Issues of Growth Management, J. A.P.A. at 53-64 (1979). 92. 480 U.S. 107 S.Ct. 1232, 94 L.Ed.2d 472 (1987). 93. 467 U.S. 229, 104 S.Ct. 2321, 81 L.Ed.2d 186 (1984). 94. 467 U.S. at 232. 95. 467 U.S. at 240. 96. 467 U.S. at 239, citing Berman v. Parker, 348 U.S. 26, 75 S.Ct. 98, 99 L.Ed. 27 (1954). 97. Nollan v. California Coastal Commission, 55 U.S. 107 S.Ct. 3141, 97 L.Ed.2d 677 (1987). 98. 97 L.Ed.2d at 687. 99. 97 L.Ed.2d at 688, n. 3. 100. Stroud, supra note 47 at 30. 101. 22 111.2d 375, 176 N.E.2d 799 (1961). 102. 22 tll.2d 375, 380, 176 N.E.2d 799, 802 (1961). 103. 68 111.2d 352, 369 N.E.2d 892 (III. 1977). 104. $gg Plote, Inc. v. Minnesota Alden Company, 422 N.E.2d 231 (III. Ct. App. 1981). 127 105. McKain v. Toledo Planning Commission, 26 Ohio App.2d 171, 270 N.E.2d 370 (1971); Dunbar v. Toledo Planning Commission, 52 Ohio App.2d 45, 367 N.E.2d 1193 (1976). 106. Aunt Hack Ridge Estates, Inc. v. Planning Commission of City of Danberry, 237 A.2d 880 (Conn. 1971). 107. Frank Ansuini, Inc. v. City of Cranston, 264 A.2d 910 (R.I. 1970)(cites "specifically and uniquely attributable" test with approval). 108. Snyder and Stegman, supra note 21 at 57. 109. 34 Cal.2d. 31, 207 P.2d 1 (1949). 110. Imo. at 8. 111. 94 Cal. Rptr. 630, 484 P.2d 606 (1971). 112. I~.at610. 113. 54 Cal. App. 3d 488, 126 Cal. Rptr. 659 (1976). 114. Id. at 662. 115. ~ Pacffic Legal Foundation v. California Coastal Commission, 188 Cal. Rptr., 655 P.2d 306 (1982); Georgia-Pacific Corp. v. California Coastal Commission, 183 Cal.Rptr. 395 (1982); Grupe v. California Coastal Commission, 166 Cal.App.3d 148, 212 Cal. Rptr. 578 (1985); Nollan v. California Coastal Commission, 223 Cal. Rptr. 38, reversed _ U.S. _ (1987). 116. 166 Cal.App.3d 148, 212 Cal. Rptr. 578 (1985). 117. at 589 itc ina Associated Home Builders etc., Inc. v. city of Walnut Creek, 4 Cal.App.3d 633, 94 Cal.Rptr. 630, 484 P.2d 606 (1971). 118. Stroud, supra note 47 at 32. 119. 28 Wis.2d 608, 137 N.W.2d 442 (1966); Snyder and Stegman, supra note 21 at 57. 120. at 448. 121. 55 S.W.2d 832, 835 (Mo. 1977). 122. I~. 123. 329 So.2d 314 (Fla. 1976). 124. $ggContractors & Builders Association of Pinellas County v, City of Dunedin, 358 So.2d 846, 848 (Fla. Dist. Ct. App. 1978), cert. denied, 370 So.2d 458, cert denied, 444 U.S. 867 (1979). 125. 338 So.2d 863 (Fla. Dist. Ct. App. 1976), cert. denied, 348 So.2d 955 (Fla. 1977). 126. 431 So.2d 606 (Fla. Dist. Ct. App.), cert denied, 440 So. 2d 352 (1983). 128 127. I~. at 611-612. 128. See e•a•, Call v. West Jordan, 614 P.2d 1257 (Utah 1980); Land/Vest Properties, Inc. v. Town of Plainfield, 379 A.2d 200 (N.H. 1977); Collis v. City of Bloomington, 310 Minn. 5, 246 N.W.2d 19 (1976); Longbridge Builders, Inc, v. Planning Board, 52 N.J. 348, 245 A.2d 336 (1967). 129. Bosselman and Stroud, supra note 80 at 77. 130. 606 P.2d 217, 219 (Utah 1979), remanded 614 P.2d 1257 (Utah 1980, rev'd on other grounds 727 P.2d 180 (Utah 1986). 131. $gg Billings Properties, Inc. v. Yellowstone County, 394 P.2d 182, 188 (Mont. 1964). 132. Bosselman and Stroud,suoranote80at77, ictinoContractorsandBuildersAssoclationofPinellas County v. Clty of Dunedin, 329 So.2d 314 {Fla. 1979); Loup-Miller Construction Co. v. City and County of Denver, 676 P.2d 1170 (Colo. 1984); City of Arvada v. City and County of Denver, 663 P.2d 611 (Colo. 1983); Coulter v. Clty of Rawlins, 662 P.2d 888 (Wyo. 1983). 133. 680 S.W.2d 802, 806-807 (Tex. 1984)(summary judgment was held improper because plaintiff-developer did not prove his case). 134. 28 Wis.2d 608, 137 N.W.2d 442, 447 (Wisc. 1966). 135. Richards and Merriam, supra note 33 at 510. 136. 264 A. 2d 910 (R.I. 1970). 137. 432 A.2d 12 (N.H. 1981). 138. Id. at 14. 139. Richards and Merriam, supra note 33 at Appendix 510. 140. See, e.g., Collis v. City of Bloomington, 246 N.W.2d 19 (Minn. 1976); Call v. City of West Jordan, 614 P.2d 1257 (Utah 1980). 141. Bosselman and Stroud, supra note 80 at 78. 142. 318 S.E.2d 407 (Va. 1984). 143. 489 A.2d 1091 (Me. 1985). 144. 680 S.W.2d 802 (Tex. 1982). 145. at 807. 146. 117 N.H. 817, 379 A.2d 200 (1977). 147. j~. at 205. 148. Bosselman and Stroud, supra note 80 at 78-79. 129 149. 631 P.2d 899 (Utah 1981). 150. I~. at 904. 151. at 905. 152. 642 P.2d 376 (Utah 1982). 153. 80 N.J. 165, 402 A.2d 927 (N.J. 1979). 154. Bosselman and Stroud, supra note 80 at 80. 155. 329 So.2d 314 (Fla. 1976). 156. Contractors & BuildersAssociation ofPinellas County v, City of Dunedin, 358 So.2d 846 (Fla. Dist. Ct. App. 1978), cert. denied, 370 So.2d 458, cert denied, 444 U.S. 867 (1979). 157. $ggCoulter v. City of Rawlins, 662 P.2d 888 (Wyo. 1983)(municipalities have the power to require payment offees inlieu ofpark-land dedication subject to the limitation that any fees collected must be earmarked for the purpose of acquiring or maintaining park facilities); Hayes v. City of Albany, 490 P.2d 1018 (Ore. App. 1971)(sewer connection charge upheld where the use of funds was restricted by ordinance to repair and construction of sewage treatment facilities); Jenad, Inc. v. Village of Scarsdale, 18 N.Y.2d 78, 218 N.E.2d 673 (N.Y. 1966)(fee In lieu of dedication for park purposes upheld where the funds were required to be credited to a separate fund to be used specifically for park and recreational purposes). 158. 446 So.2d 140 (Fla. Dist. Ct. App. 1983). 159. 160. 336 A.2d 501 (N.J. Super. 1975). 161. 105 Wash.2d 288, 714 P.2d 1163 (Wash. 1986). 162. at 1169; comma City of Fayetteville v. IBI, Inc., 659 S.W.2d 505 (Ark. 1983)(requirement of land dedication or fee in lieu thereof struck down where statute permitted reservation of land in accordance with plans, and no plan was currently in effect). 163. Snyder and Stegman, supra note 21 at 59. 164. 446 So.2d 140 (Fla. Dist. Ct. App. 1983). 165. _ U.S. 107 S.Ct. 3141, 97 L.Ed.2d 677 (1987). 166. 97 L.Ed.2d at 683. 167. 168. I~. at 684. 169. i~. 130 170. 177 Cal App. 3d 719, 223 Cal. Rptr. 28 (1986). 171. 97 L.Ed.2d at 658-687. 172. I~. at 687, itc ina Agins v. Tiburon, 447 U.S. 355, 360 (1980). 173. J~. at 688, n.3. 174. ISJ. 175. I~. at 689. 176. I~. 177. I~. 178. I~. at 690. 179. I~. at 690-691. 180. I~. at 692. 181. See generaliv Freilich and Morgan, Munirinal trateq~ for Imposing Valid Development Exactions: R~gondinq to Nollan, 10 Zoning & Plan. L. Rep. 169-76 (Dec. 1987). 182. S,~g Best, The Silpreme Court Becomes Serious About Takings Law, 10 Zoning & Plan. L. Rep. 153-59 (Oct. 1987). 183. 447 U.S. 355, 360 (1980). t 84. Freilich and Morgan, supra note 181 at 173. 185. I~. 186. Stroud, sunra note 47 at 34. 187. Imo. 188. Taub, Exactions Linkage and Rey ~I~ story Takings -The Developer's Perspective 728 (prepared for ALI-ABA Land Use Institute, Planning, Regulation, Litigation, Eminent Domain, and Compensation 1987). 189. I~. 190. I~. at 728-730. 191. Bonan v. City of Boston, 398 Mass. 315, 496 N.E.2d 640 (1986). 192. Taub, sunra note 188 at 729-730. 193. 359 N.E.2d 1279 (Mass. 1977). 131 194. See generally, Taub supra note 188 at 733; San Francisco Planning Code Sec. 313(f)1)(1985). 195. ewe generally Taub, supra note 188 at 733. 196. 177 Cal.App.3d 892, 223 Cal. Rptr. 379 (Cal. Dist. Ct. App. 1986). 197. at 389. 198. I~. at 391. 199. 234 Cal. Rptr. 1 (Cal. Dist. Ct. App. 1987). 200. Seattle Municipal Code Sec. 22.210 (1985). 201. 108 Wash.2d 20, 735 P.2d 673 (Wash. 1987). 202. Id. at 675. 203. Taub, s r note 1 SS at 738-39. 204. I~. at 739-740. 205. See g n~eraliv Taub, supra note 188 at 728-740; Connor and High, The Expanding Circle of Exactions From Dedication to Linkage, 50 Law and Contemp. Prob. 69 (Winter 1987); Kayden and Pollard, Link-oe Ordinances and Traditional Exactions Analysis: The Connection Between t)ffi~e Development and Housing, 50 Law and Contemp. Prob. 128 (Winter 1987); Smith, From Subdivision Improvement Requirements to Community Benefit Assessments and Linkage o^• nts A Brief History of Land Development Exactions, 50 Law and Contemp. Prob. 5 (Winter 1987); Nelson, Downtown Office Development and Housing Linkage Fees, J. A.P.A. 197 (Spring 1988); Andrew and Merriam, Defensible Linkage, J. A.P.A. 199 (Spring 1988); See Qgnerally, J. A.P.A., Vol. 54, No. 2 (Spring 1988). 206. Connor and High, s r note 205 at 82-83. 207. Mandelker, supra note 11 at 215. 208. e~gggngrally_ Mallach, Inclusionary Housing Programs: Policies and Practices 29-51 (1984). 209. 214 Va. 235, 198 S.E.2d 600 (Va. 1973). 210. Mandelker, supra note 11 at 216. 211. Mallach, supra note 208 at 30. 212. 336 A.2d 713 (N.J. 1975), appeal dismissed, cert. denied 423 U.S. 808 (1975). 213. 92 N.J. 158, 456 A.2d 390 (1983). 214. 92 N.J. at 261. 215. 92 N.J. at 271. 132 216. 94 N.J. 358, 464 A.2d 1115 (N.J. 1983). 217. Lillydahl, Nelson, Ramis, Rivasplate, and Schell, supra note 81 at 14. 218. Isj. at 14; Nichols and Nelson, oatormininq~he Aooronriate Development Impact Fee Usinq the Rational Nexus Test, J. A.P.A., Vol. 54, No. 1 at 56 (Winter 1988). 219. Banberry Development Corporation v. South Jordan City, 631 P.2d 899, 904 (Utah 1981). 220. ~ Nichols and Nelson, supra note 278 for a discussion of how each of these factors may be computed and methods which have been used to calculate various kinds of Impact fees. 221. Lillydahl, Nelson, Ramis, Rivasplate, and Schell, supra note 81 at 14. 222. Nichols and Nelson, supra note 218 at 60. 223. IQ. 224. Home Builders & Contractors Assn. of Palm Beach County, Inc. v. Board of County Commis of Palm Beach County, 446 So. 2d 140 (Fla. Dist. Ct. App. 1983). 225. Lillydahl, Nelson, Ramis, Rivasplate, and Schell, SUDrg note 81 at 14. 226. Haw. Rev. Stat. Ch. 61 and 62. 227. Hawaii Constitution, Article VIII, Section 2. 228. City & County of Honolulu v. Ariyoshi, 67 Hawaii 412, 689 P.2d 757 (1984). 229. County of Honolulu Charter; County of Hawaii Charter, County of Kauai Charter; County of Maui Charter. 230. County of Honolulu Charter, Article II. 231. County of Hawaii Charter, Article II: "The county shall have all powers possible under the constitution and laws of the State of Hawaii, including all powers now or hereafter given by such constitution or laws, and all other powers not prohibited by such constitution or by this charter. The county shall have such powers as fully and completely as though specifically enumerated in this charter, and no enumeration powers in this charter shall be deemed exclusive or restrictive." County of Kauai Charter, Article II: "To promote the general welfare and the safety, health, peace, good order, comfort and morals of its inhabitants, the county shall have and may exercise all powers necessary for local self-government, and any additional powers and authority which may hereafter be granted to It, except as restricted by laws of this State. The enumeration of express powers in this charter shall not be deemed to be exclusive. In addition to the express powers enumerated herein or implied thereby, it is Intended that the county shall have and may exercise all powers it would be competentfor this charterto enumerate expressly." County of Maui Charter, Article II: "The county shall have all powers possible for a county to have under the constitution and laws of the State of Hawaii. These powers shall include, but shall not 133 be restricted to, or by, the following: all powers now or hereafter given by the constitution or other laws, and all other powers not prohibited by such constitution or by this charter, to the county or its agencies, or to counties or county agencies, and all powers necessary and proper to carry into execution other powers of the county. The county shali have all such powers as fully and completely as though they were specifically enumerated in this charter; and no enumeration of powers in this charter shall be deemed exclusive or restrictive." 232. See supra note 216, section III.A.2.a. 233. City & County of Honolulu v. Ariyoshi, supra note 217 at 763. $gg, Hawaii Govt. Employees' Assn v. County of Maui, 59 Hawai165, 576 P.2d 1029 (1978). 234. 689 P.2d 757 (Hawaii 1984). 235. Id. at 764. 236. Id. at 763. 237. Id. 238. Hawaii Constitution, Article VIII, Section 6. See also, Baggett v. Gates, 32 D.3d 128, 649 P.2d 874, 165 Cal.Rptr. 232 (1982); Stephanus v. Anderson, 26 Wash.App. 326, 613 P.2d 533 (1980). 239. section II.A. 240. $ee Sl1Dra+ section III.A.2.a. 241. Callies, Regulating Paradise -Land Use Controls in Hawaii 24-25 (1984). 242. Haw. Rev. Stat. Sec. 46-4 (1985). 243. Id. 244. Haw. Rev. Stat. Sec. 246 (1980); Haw. Rev. Stat. Sec. 248 (1984); Haw. Rev. Stat. Sec. 249 (1984). 245. Haw. Rev. Stat. Sec. 340-3(a)(1985). 246. Haw. Rev. Stat. Sec. 61-2(3), 62-34(5), 46-13(1985). 247. Haw. Rev. Stat. Sec. 46-15.1, 359G-4(e)(1985). 248. S..ee ,State Planning Act, Chapter 226, Hawaii Revised Statutes, Section 226-23. 249. Maui County, Haw., Proposed Ordinancefor Impact Feesfor Traffic and Roadway Improvements in West Maui, Hawaii (amending Title 14 of the County Code by adding a new article 4) (Mar. 4, 1988). 250. at Sec. 14.62.010. 251. Isj. at Sec. 14.62.030. 252. at Sec. 14.62.050. 134 253. j~. at Sec. 14.62.070. 254. at Sec. 14.62.080. 255. Imo. at Sec. 14.62.090. 256. Imo. at Sec. 14.62.100. 257. I~. at Sec. 14.62.110. 258. at Sec. 14.62.120. 259. Guidelines of the Planning Comm'n, County of Maui Relating to Employee Housing Requirements for Hotel Developments. 260. at Sec. 1-1(B). 261. Imo. at Sec. 1-1(A). 262. I~. at Sec. 1-1(G). 263. Hawaii County, Haw., Proposed Ordinance for Impact Fee Code (Oct. 9, 1987). 264. Imo. atArt. 1, Sec. 3. 265. Imo. at Art. 1, Sec. 6. 266. Isl. at Art. 1, Sec 7. 267. J~. at Art. 1, Sec. 8. 268. Isl. at Art. 1, Sec. 9. 269. Imo. at Art. 1, Sec. 10. 270. I~. at Art. 1, Sec. 11. 271. 1.~. at Art. 2. 272. I~. at Art. 3. 273. j~. at Art. 4. 274. at Art. 5. 275. Isi. at Art. 6. 276. I~. at Art. 7. 277. I~. at Art. 8. 278. Kauai County, Haw., Ordinance 396 (Aug. 11, 1980). 135 279. ISi. at Sec. 1. 280. I~. at Sec. 5. 281. I~. at Sec. 4. 282. Imo. at Sec. 6, 8. 136 CHAPTER 4 Impact Fees and Housing Exactions Programs: An Economic Analysis by Louis A. Rose, Ph.D. ABSTRACT The following chapter explains the nature of proposed infrastructure impact fees and existing housing exactions programs, describes their effects on housing rents and prices, and evaluates them with respect to economic efficiency and fairness. It compares them with alternative methods of financing or otherwise achieving given government objectives regarding housing and infrastructure. Housing programs reflect government's concern that more affordable rental housing be provided for low- income households, and that homeownership be encouraged for moderate-income households. Impact fees reflect government's need for additional financial resources to cover the cost of off-site shared infrastructure. Although the focus of this study is exclusively on residential development, its findings are generally applicable to developments of all types. In this study, we assume that impact fees must be paid for all types of projects, not only residential, but commercial, industrial and resort, aswell. Because impactfees have some merit and are worthy of consideration, we describe and evaluate their effects in some detail. Our summary of housing exactions programs, however, is brief, reflecting their lack of merit. Impact fees can be used to pay for the off-site infrastructure that solely serves a development, and a portion of the shared off-site infrastructure, so long as that portion can be directly attributed to the development. On both fairness and economic efficiency grounds, thefees should not be used to upgrade the service level, nor should they be used to pay for the operation and maintenance of an infrastructure system. When developers pay the impact fees or other development exactions, their marginal costs increase. Developers respond by reducing the flow of new housing production. While this effect is partially offset by the fees' inducement of improvements to old dwellings or the construction of illegal units, the net result is a smaller flow of housing and thus, a reduction in the stock of housing. There is also a corresponding reduction in the supply of housing services (i.e., rental services). 137 The reduced housing stock and services results in a rise in housing rents, which in turn, tends to be capitalized into higher housing prices. The rise in housing price will be roughly proportional to the rise in rent. At the same time, the impactfeeswill induce a fall in developable (i.e., undeveloped) land prices and a corresponding rise in developed land prices. This is because the developers who pay the impact fees will escape their burden by shifting them forward to housing buyers and tenants, and backward to the owners of developable land. It is important to note that the rise in housing prices and rents is not confined to the new development's units alone, but also applies to existing housing throughout the market. Policy-makers should be concerned with the long-run effects of their policies. The long run is a period of time long enough for the stock of housing to fully adjust to a new lower level reflecting the increase in development costs due to the impact fees. (This adjustment period will usually take well under ten years, and in some areas of rapid growth, no adjustment period will be necessary.) In the long run, the new stock of housing will have fully adjusted to a new level that is lower than it would have been in the absence of the fees. The most burdensome effects of the impact fees in the long run are the increased rents on tenants and increased prices on future home buyers, for both existing residents and new arrivals, and depressed prices on the owners of developable land. The higher rents and prices discourage housing consumption by both tenants and owner-occupants. In addition, the higher prices discourage homeownership relative to rental. This is because the rise in price relative to household income results in a higher effective mortgage rate, and thus, a higher user cost of homeownership relative to rental. Of course, those who already own housing when the impact fees are imposed obtain an increase in home market value that tends to offset their increase in the opportunity cost of occupancy. Impactfees represent potential reductions in those revenue sources that supply State and County general and special funds that are currently used to pay for infrastructure development (assuming that government will substitute the fees for the current revenue source). Such revenue sources include the State general excise and personal income taxes, and special taxes such as the vehicle fuel and vehicle weight taxes. There would be a potential reduction in the prices of goods, and a potential increase in disposable incomes, generally. The net effect, however, would be to redistribute the burden of infrastructure costs across the members of the community in complex ways. To evaluate the economic effects of impact fees and housing exactions, the following criteria are used: (t) the principle of economic efficiency; (2) the principle of fairness, which includes the two ancillary principles ofpayments-for-benefits and ability-to-pay; and (3) the guideline of horizontal equity and vertical equity, which is applicable to both of the above principles. These criteria are explained in due course. Economic efficiency occurs when we use our land and other scarce resources to provide for the community a more valuable combination of housing, infrastructure, and other services. I n principle, impact fees, such as the existing water connection fees, are a more economically efficient means of financing all types of development-attributable infrastructure than the existing system of ad hoc "unilateral" facility exactions, non-water charges, and taxes. It is assumed here that impact fees, if adopted and implemented, would not supplement but rather, replace not only the facilities components of existing fees and taxes, but also replace the current government practice of exacting facilities and payments on an ad hoc basis from the larger developers. For State- provided roads, schools, school sites, and parks, impact fees are more efficient than the general excise or personal income taxes now used, due to the absence of a direct link between the facilities and the purchase of taxable products or the earning of taxable income. For County-provided sewer, road, park and water systems, the fees are more efficient than the property tax to retire the debt incurred for the additional infrastructure to preserve the service level that would be potentially degraded by the new development. 138 The benefit principle holds that those who benefit from goods or services should pay for their costs. This principle is generally acceptable when applied to water, sewer, road, and locally-used park facilities. It is embraced by advocates of not only user charges, but also the system of pay-as-you-go financing of infrastructure. The ability principle, in contrast, holds that people should pay for goods or services in proportion to their ability. In this regard, income is considered to be the best indicator of ability to pay. This principle is generallyacceptablewhen appliedto the public education system, visitor-parks, and rental housing programs for low-income households. Horizontal equity means equal treatment of equals, while vertical equity implies that people in different circumstances should be treated differently. Impactfees are in principle afairer method of distributing some types of shared, development-attributable infrastructure costs. This conclusion applies to road, sewer and locally-used parks, as well as water facilities. It is based on our application of horizontal and vertical equity rules to the payments-for-benefits principle. Since governments' provision of shared facilities benefits developers, giving them saleable "rights" for future development occupants to use the community's facilities, developers should then pay for additional facilities to prevent development-attributable degradation of the off-site infrastructure services. In addition, consumers who use an infrastructure system should be required to pay user charges for the operation and maintenance of user-attributable Infrastructure. The fairness of impact fees under the benefit principle derives from the concept that it is fair to assign "property rights" in the existing facilities to existing occupants and owners; then, for occupants and owners of the new development to benefit from the services of the facilities, they must pay for the additional infrastructurenecessarytopreservethecommunity'sservicelevel. However,Itshouldbekeptinmindthat the ultimate benefit and burden of the increased infrastructure does not accrue exclusively to those who use and pay for it. There is an incidence of infrastructure benefit and an incidence of impact fee burden, although It is impossible to determine precisely who are the benefitted and burdened people. The uses of Impact fees consistent with the benefit principle must be constrained to avoid double taxation. If impactfees are structured solely to cover the difference between (a) facility costs and (b) revenues raised from the new development and Its occupants through existing fees and taxes, then they will not comprise a double tax for the same infrastructure. Under the benefit principle, upgrading the community's service level should not be financed through impact fees, but rather, through community-wide user charges, or (at least), taxes on the community as a whole. The benefit principle supports the financing mechanism of pay-as-you-go (where fees and taxes are collected at a rate sufficient to retire the bonds at the end of facility Ilfe). This Is in contrast to the short- termpayback method often employed by State and County governments. If the financing period is shorter than the facility's economic life, and if the rate of household growth is greater than the real interest rate, then established residents will pay more than the economic cost of the facilities that serve them, and the in-migrants to the community who benefit from the pre-paid infrastructure wil I cause an excess burden on the old residents. Impact fees paid by developers, however, should not be used to remedy the inequitable cost distribution between old and new residents due to short-term payback. This is because new arrivals do not generally occupy the developer's new units; established residents do. Impactfees are preferable to ad hoc exactions on both efficiency and fairness grounds. Efficiency requires that large and small developers alike be made to bear the ful I social costs of their respective developments. Exacting small facilities from small developments does not take full advantage of economies of scale. Service levels can be preserved at a lower cost by a few large facilities, rather than many smaller facillti~s. Under impact fees, payments made by large and smal I developers would lie proportional to development size, and could be used to pay for development-attributable, government-provided, economically-sized facilities. This is horizontally and vertically equitable. It is also both fair and efficient to grade the per-unit fees according to location or terrain to reflect varying costs of off-site infrastructure construction to 139 preserve service levels. Itwould be unfair and inefficient, however, to grade the fees for political purposes in ways unrelated to cost. In contrast to the benefit principle, which has general acceptance as a fair rule for spreading the cost of water, sewer, road, and local-park facilities, the ability-to-pay principle is often seen as the fairest rule for distributing the cost of educational and visitor-park facilities, as well as rental housing subsidies. The ability principle is best implemented through a tax on individuals' income. On the grounds of economic efficiency, the Counties should assume full responsibilityfor the construction and financing of roads, sewer, water, and locally-used park facilities. The State should assume full responsibilityfor educational and visitor-park facilities. In addition, on both efficiency and ability-fairness grounds, a State role in the financing of housing can be argued. According to our evaluative criteria, housing exactions have no social merit and should be abandoned. They are economical ly inefficient, and wil I promote wasteful use of our land and other resources. They are wasteful because they replace the market system, with its incentives to produce at least cost what consumers demand, with a bureaucratic system that lacks such incentives. Housing exactions are also inconsistent with al I generally accepted rules of fairness. In the absence of cost-decreasing inducements for developers to offset the cost-increasing requirements of exactions programs, it is likely that these programs will actually be counterproductive with respect to government housing objectives. Housing exactions programs segregate the market into households with different incomes and give some household groups access to the exacted dwellings in a closed market, while denying others that access; the latter group must shop in the open market. Any exactions-induced changes in the low-income group's housing consumption and in the moderate-income group's homeownership must occur through changes in the developers' revenue or cost schedules that affect, respectively, the stock of housing which influences rents, and the user cost of owner services relative to rent. In other words, if changes in developers' revenue or cost schedules (e.g., relaxation of density and construction standards, which lowerthe development costs) cause them to increase housing production, then the stock of housingwill increase and rents and priceswillfall, thus, inducing more consumption and homeownership. Conversely, a decrease in revenue schedules or an increase in cost scheduleswill have the opposite effects. The long-run effects of housing exactions programs are of concern to us here. An historical description of the long-run effects of government slum clearance and urban renewal illustrates the difference between short-run and long-run effects of a housing program. In the short-run, demolishment of slum dwellings in Mainland cities did result in the reduction of the number of households occupying slum dwellings. However, since the evicted households created an excess demand for low-quality dwellings and since therewas no subsidy or income increase to induce the consumption of more housing services, and since there was no reduction in the cost of producing those housing services, the long-run result was that the households were simply relocated to different dilapidated dwellings that landlords had down-filtered to slum-quality level. Affordable dwellings can be seen as moderate-sized bundles of housing, whereas market-preferred dwellings are optimally-sized bundles of housing. Government's requirement that developers provide moderate-sized bundles to add to the housing stock is intended to alter the distribution of bundle sizes in the stock. However, as seen in the example on slum clearance, the distribution of bundle sizes in the long run depends on a number of factors that are not directly affected by the housing exactions, such as the distribution of household size and income, and the response of landlords throughoutthe housing market. Therefore, when exactions of moderate-sized bundles cause a bulge in the middle of the bundle size distribution, rents and prices of these bundles fall relative to the other sizes, and up- or down-filtering occurs to maximize the owners' returns on investment. 140 Thus, in the open (f.e. unrestricted) market, the result of housing exactions programs that increase developers' costs and/or reduce their revenues is not only a lower housing stock, but also no change in the mix of dwelling sizes or qualities. This Is due to: (1) the failure of the exactions programs to affect the basic determinants of the housing mix; and (2) massive filtering by owners of both exacted dwellings and non-exacted dwellings. If the government-determined prices and rents in the closed market are not low enough to sell and lease all of the exacted dwellings to the targeted Income groups, government can: (1) provide additional subsidies to attract more consumers from the targeted groups; (2) relax restrictions on the transfer or use of the dwellings (e.g., allow retention of capital gains); (3) raise the ceiling on household income, thus increasing eligibility; or (4) reduce prices and rents. It is not certain whether government or the developer will Incur the losses, given any of the above possibilities. If, on the other hand, prices and rents are lower than necessary to clear the market, resulting in an excess demand by those in the targeted groups, there will have to be greater cross-subsidies from the buyers and tenants of optimally-sized dwellings. One effect of an exactions program that Increases developers' costs and/or decreases their revenues Is to decrease low-Income households' housing consumption, on the average. This is due not only to (a) the absence of sufficlentcost-decreasinginducementstodevelopers; butalso(b)thepossiblyliberaleligibllity standards permitting some tenants or subsidized home owners to enter the closed marketwhen theywould have rented more housing on the open market; and (c) the difficulty of preventing landlords in the closed market from down-filtering their dwellings. Another effect of such an exactions program is to decrease moderate-income households' homeownership. In sum, costs of such exactions will shift primarily to tenants and first-time home buyers throughout the open market. The remainder of the burden will rest on landowners and taxpayers, and possibly some developers. There are far more efficient and equitable means of achieving governments' housing obJectives that are consistent with the ability-to-pay and horizontal and vertical equity rules. Government should consider relaxing supply-side constraints (i.e., zoning and permitting restrictions). It should also consider two demand-side incentives: additional housing vouchers for low-income tenants and time-phased income tax credits for first-time, moderate-Income home buyers. Inclosing,weshouldnotetwoaddltionalfindingsofthestudy. First,ourrecommendeduseofimpactfees, the Income tax, housing vouchers, and income tax credits all share certain desirable institutional characteristics that sharply contrast with some existing and proposed substitute policy Instruments such as"unilateral'infrastructurerequlrementsandhousingexactions. Therecommendedalternativesestablish simple, horizontally and vertically equitable and, hopefully, stable rules to guide socially responsible behavior,ratherthancreatingaddltionalopportunitiesforpolitical-bureaucraticdiscretion. Simple, stable rules preserve more certainty in the development process, grant more freedom to developers and consumers, and keep private-public sector relations above reproach. 141 AN ECONOMIC ANALYSIS 1. INTRODUCTION Back rp mound State and County governments in Hawaii have set forth certain objectives relating to Infrastructure and housing. One objective is to ensure the provision of adequate infrastructure: roadway, sewer, water, school and park facilities for the society. Another objective Is to ensure the availability of adequate and affordable rental housing for low income households, and to encourage homeownership for non-high income households. Our governments have attempted to achieve these objectives through a variety of means that regulate private development, finance Infrastructure and housing construction, and price their usage. Serious questions can be raised about how government goes about achieving these objectives, as well asthejustifiabilityoftheobjectivesthemselves. Wlthrespecttoinfrastructureobjectives,forlnstance,one could ask whether the State and County governments' standards are appropriate. One could also ask whether governments properly price and regulate the usage of the existing facilities, and whether they employ justifiable investment rules for new facilities. With respect to housing objectives, the question could be asked whether a housing deficiency in Hawaii genuinely exists or whether the problem can be more accurately identified as slow-Income problem. And if the root of the problem is income, to what extent should our governments be attempting to redistribute income via housing policies? On the other hand, ff there is a basic housing deficiency that should be addressed at the State or County level, then shouldn't our governments' commitment be focused on help for low-income tenants? In other words, to what extent should the police and tax powers of our governments be used to subsidize moderate-income households' homeownership? Do we take into accountfully the long-run implications of our governments' housing policies regarding the population and tax base? While we hope that there are those who will continue to ask and address these and other important questions regarding our infrastructure and housing objectives, the questions go beyond the scope ofwork before us. We shall therefore regard the governments' objectives as given, and devote full attention to explaining and evaluating impact fees and housing exactions programs as a means of fulfilling our infrastructure and housing objectives, as well as some alternative means of financing these objectives, utilizing economic evaluative criteria. Over the past 25 years, three-fourths of the infrastructure In Hawaii has been constructed by State and County governments, and one-fourth by private developers, particularly the larger ones (Rose and Lowry, 1982). Government construction has been financed out of bonds, which have been retired out of various funds. The State's bonds for road, education and park facilities have been retired out of a general fund fed largely by general excise and income taxes. The Counties' bonds for roads have been retired out of a general fund fed primarily by a real property tax. Their debt for sewer facilities has been retired out of the property tax and special sewer assessments. Water facilities debt has been retired out of water connection, storage and usage fees. Developers' construction of infrastructure has been predominantly on-site streets and sewer and water conduits; on occasion they have constructed other sewage and water facilities on site, and dedicated land for schools, parks and, more recently, for day-care centers. Finally, through connection fees and especially ad hoc exactions, called unilateral agreements, the larger developers have Increasingly constructed or paid for off-site infrastructure. 142 In contrast to the development of infrastructure, the construction of housing has, so far, been left almost entirely to private developers and builders. The State and Counties have, to date, built only a smal I number of housing units for sale on their own land. Both levels of government have, of course, long restricted the amount and type of private housing construction through their zoning and permitting institutions. The land use restrictions haveconstrained housing production, resulting in increaseddemand and increased prices, which indirectly reduce the availability of adequate and affordable rental housing and discourage homeownership. On the other hand, the State has provided public housing and rental vouchers for private housing tolow-income households. Also, the State income tax has encouraged the private supply of rental housing by providing generous depreciation allowances, and encouraged homeownership by providing interest deductibility andfavorabletreatmentofcapitalgains. While the public housingandrentalvoucher costs have been mostly covered out of Federal funds, the State has foregone Income tax revenues to encourage rental housing construction and homeownership. Astor the Counties, some have gotten some large developers to unilaterally provide affordable units for rental and owner occupancy. Growth in the number of households, rising housing and facility standards, reduced Federal funding, and the burden of replacement have brought Hawaii governments to consider alternative means of paying for Infrastructure aswell as housing. Counties are considering the imposition of impact fees on developers to help pay for County construction of off-site infrastructure that is needed because of the new development. From an economic standpoint, these one-time fees are essentially specific excise taxes per new housing or bedroom unit, with each fee earmarked for a specified type of infrastructure. Thus, they are an extension of existing water connection fees to other types of infrastructure. To help achieve thef[ housing objectives, all Counties as well as the State are currently considering and even Implementing, the exaction of large numbers of new lower-cost housing units for both rental and ownership by targeted income groups. Puroose The first purpose of this chapter is to explain the economic effects of impact fees and housing exactions programs. Some effects of primary Importance are those on the amount of new and old housing units, and their rents and prices, and also the prices of land. It is equally important to explain the distribution of the burden of these policies to new vs. established residents, low-income tenants, moderate-income potential homeowners, large vs. small developers, and landowners. Of course, developers will make the impact fee payments and suffer the Immediate consequences of affordable housing exactions. However, under certain market conditions, it is possible for the burden to be shifted to others. For example, the policies may cause a rise in housing rents and a fall in undeveloped land prices, so that tenants and landowners ultimately bear some of the burden of infrastructure and affordable housing. The Incidence of the fees and exactions (i.e., the distribution of their burden) must be explained and understood in order to make informed decisions regarding their adoption and implementation. The second purpose of the chapter is to evaluate impact fees and affordable housing exactions by comparing their effects with the effects of existing or selected plausible alternative policies for achieving the same infrastructureand housing objectives. This evaluation requires the adoption of criteriafor judging the effects of the various policies. Our first criterion is economic efficiency: the use of society's limited resourcesto produce the highestvalued combination of servicesfrom housing, infrastructure, and all other goods. The remaining criteria are standards of fairness. 143 Evaluative Criteria Economic Efficiencyprinciole Thefirstcriterioniseconomicefficiency. Abriefexplanationofthepossibleeffectsofgovernmentpolicies on the efficiency of resource usage should be helpful. Government regulation of developers directly changes theway inwhich resources are used by specifying housing densities and construction standards, etc. Government pricing of housing (In its specification of house rents and prices) and the issuance of bonds and imposition of fees or taxes to retire them, indirectly change the way in which society uses resources by altering the effective prices of resources and products. For example, developers use the efficient amount of land for housing each year onlyrf its price, including any fee or tax, equals the social benefit of the marginal acre (i.e., the last acre used for housing that year) in Its best alternative use. To use another example, households use the efficient amount of housing resources only if the price of housing equals the marginal social cost of producing it. Marginal social cost is simply the additional cost to society of producing the last housing unit that year. It is the value to society of the non-housing goods that would have been produced with the resources It took to produce the last housing unit. This includes not only the costs that developers and builders normally bear--land, lumber, cement and laborers' wages, etc.--but also the additional road congestion, lowered water pressure and the like Imposed on prior residents. Prices of land or housing that are too high will encourage under-usage of the resources and product; prices that are too low will induce over-usage. When markets are capable of efficient operation so that prices equal marginal social costs, then government regulations on production and prices, and the Imposition of fees and taxes, Induce waste. On the other hand, when markets are Incapable of efficient operation, as might be the case when there is an externality or a monopoly, then it is possible that such government policies will restore efficiency. FAIrnPCC PrinriRlgc~ Benefit and Ability: and Equity We also adopt a general guideline and two differentfairness criteria for rating the alternative policies. The two criteria are the payments-for-benefits and ability-to-pay principles. The guideline, called horizontal and vertical equity, is applicable to both of the principles. The benefit principle is an endorsement of the market's method of paying for the production of goods. It holds that those who benefit from government- (or private sector-)provided goods should paytheir costs. This principle is acceptable to many when applied to water, sewer, and road facilities, and it Is sometimes invoked by advocates of charges for their use (f.e., user charges). It is also the basis of intergenerational equity arguments for pay-as-you-go financing of infrastructure (I,e., bond financing of long-lived facilities, with bond retirement coinciding with the end of the facilities' economic I'rfe). In the absence of user charges, and when facilities outlive the tax-based bonds that finance their construction, then new arrivals to a community obtain facility benefits without paying. Established residents who object to this often invoke the benefit principle. The ability principle holds that people should pay for government programs in proportion to their ability. One's ability to pay can be measured in terms of his income, wealth, or consumption, adjusted for the number of dependentsandothercondltions. Manyviewincome,properlymeasured,asthebestindicator. Only a few feel that the value of real property, which is but one component of wealth, is a good measure of ability. This principle is acceptable to many when applied to the public education system and rental housing programsforlow-incomehouseholds. Theseadvocateswouldhaveuspayforthesefacilitiesout of a progressive Income tax. 144 Horizontal equity simply means equal treatment of equals. This rule can be applied to both of the above- described principles. For example, those who receive the same amounts of benefit should pay the same fees; those who receive the same income should be taxed at the same marginal rate. Vertical equity implies that people in different circumstances should be treated differently. This permits an extension of the above examples: people should pay in proportion to benefits received; and people should be taxed on their income at a proportional rate or at progressive rates. Horizontal equity further Implies that the exactionofoff-site infrastructureandaffordablehousingfromlargeresidentialdevelopments, butnotsmall ones, is unfair. Our fairness evaluation of impact fees for water, sewer, road and local ly-used park facilities will rest largely on the benefit principle and the two equity rules. Our fairness evaluation of impact fees for educational and visitor-used park (i.e., tourists) facilities, and housing exactions will rest mainly on the ability principle and equity rules. This selection of criteria conforms with an apparent social consensus regarding fairness. In other words, the benefit principle is a more suitable standard or measuring stick for an economic fairness evaluation of water, sewer, road and locally-used park infrastructure impact fees, whereas the ability principle is more suited to a fairness evaluation of educational and visitor-park facilities fees and housing exactions. As we shall see, a correlation does not necessarily exist between economic fairness and economic efficiency: a fee or tax or exaction policy that is fair may or may not be efficient, and vice versa. This, of course, presents the policy-maker who endorses the criteria of both fairness and efficiency with a difficult choice. Other Criteria Although our evaluation will be conducted exclusively within the framework of economic efficiency and fairness, it should be noted that there are other grounds for rating the alternative policies. One is that private individual freedoms should be encouraged. Because government exercises police and taxation powers, the standard of freedom suggests less government involvement and the achievement of community objectives by methods that preserve freedoms for households and developers. Of course, government's redistribution of income through the exercise of these powers creates more freedom for some (often not the poor!) at the expense of others. But there are always alternative ways of creating opportunities for low-income groups, and some methods provide more opportunities for low-income groups, and some methods provide more opportunities than others at the same cost. For example, an income supplement allows the low-income recipient more freedom than a housing voucher; a housing voucher in turn, provides more opportunities than a specified housing unit assignment. Other grounds for rating alternative policies include the preservation of both (a) some degree of certainty aboutthefuture, and (b) honesty atthe intertace of government and the market. These provide guidelines for the structuring of government's powers of production, regulation and taxation. Government officials just'rffably require some discretionary powers to achieve basic infrastructure and housing objectives, especially in view of how conditions vary across types, sizes, locations, and the timing of developments. However, It can be argued on both of these grounds, that government's application of stable rules regarding exactions of infrastructure or affordable housing is preferable to the exercise of discretion. Stable rules allow fewer opportunities for government's creation of surprise conditions for development, and tend to keep private-public sector relations above reproach. The issues raised above are all in relation to the effects and evaluation of alternative means of financing government objectives. An additional issue is the appropriate level of government at which objectives ought to be set, implemented, and financed. We shall, in due course, employ some of the above criteria to evaluate whether the State or Counties should make these decisions. 145 II. INFRASTRUCTURE IMPACT FEES The Nature of Impact Fees Impact fees are once-only charges, in dollars per dwelling or bedroom, on the construction of new dwellings. There can be many variants on the specification and application of such fees. In this study, we assume that the fees must be paid for all types of projects, not only residential, but commercial, industrial and resort, as well. Ourfocus here, however, is almost exclusively on housing projects. Developers of all ' sizesofhousingprojects,andevenindividualswhowanttobuildasecond(e.g.,"ohana")dwelling on their residential lot, must pay the fees when they obtain permission to develop their sites. This is the premise of the impact fee legislation currently being considered by Hawaii County and Maui County. Each fee is earmarked for a particular infrastructure system such as a roadway system, or a water, sewer or park system. The fees are supposed to pay for the public provision of facilities other than standard on-site infrastructure. They are not to pay for on-site sewer and water transmission lines, or streets, including sidewalks, curbs, storm drains, and underground utility cables since generally, the developer must provide these facilities that exclusively serve the development. The fees must benefit the residents of the development. They can be used to pay for not only (1) the off- site infrastructure that solely serves the development, but also (2) a portion of all of the shared off-site infrastructure that serves both the development and other areas in the community, as long as that portion covered by the fees can be directly attributed to the development. Thus, there are apparently no limits on the types of infrastructure system components that can be paid for out of impact fees, so long as they are development-attributable. For example, water fees could be applied not only towards the installation of amain between the city reservoir and the development, but also an enlargement of the reservoir. It is also understood that fees can sometimes be waived in lieu of the developer's provision of the facilities. Examples of such facilities include on-site water wells and sewage treatment plants, and off-site road improvements and sewer interceptors. The legal limits of impact fee applications, as established by various Courts, are summarized in the so- cailed three-part "rational nexus" test. First, the development must create a need for new capital facilities. Second, there must be a reasonable relationship between the need created by the development and the size and nature of the fee. Third, the collected fee must be applied towards facilities that will benefit the development. This "rational nexus" test is consistent with the economic notion that developers can be made to pay the marginal social cost of development-attributable infrastructure, no matter where in the infrastructure system the cost is incurred. Payment of this cost covers the additional infrastructure necessary to mai ntain service levels for established residents in caseswhere the developmentwould result in incremental congestion along an arterial road, an incremental drop in water pressure, a crowded classroom, or any other cost imposed on prior users of an infrastructure system. The fees cannot be applied towards infrastructure to upgrade the service level, nor can they be used to pay for the operation and maintenance of a road, water, sewer, park or school system. While the fees can be graded to reflect different costs of infrastructure at different locations, they cannot be graded to achieve some arbitrary spatial pattern of land use. In the absence of any major change in the interpretation of the rational nexus test that might result from the recent U.S. Supreme Court decision in Nollan v California (:nactal Commission, these will continue to be the bounds for application of impact fees. Analytical Concepts An explanation of the effects of impact fees requ fires conceptual distinctions between housing and housing 146 service, rent and price, flow and stock, and short and long run. Housing is the durable structure on improved land, produced by developers and builders for landlords to purchase in the housing marketfor a price measured in dollars. Housing service is the service yielded by housing and sold by landlords to tenants in the service market for a rent measured in dollars per year. Of course, in the case of owner- occupiedhousing, the owner is not only landlord but also tenant, so he effectively pays the rent to himself. Our task is to explain the effects of impact fees on both rent and price. At anypolnt in timethere is a stock of housing, i.e., a number of housing units, in the housing market. Price is determined by this stock and landlords' demand for housing. Out of the stock, there is a flow of housing services in the services market. Rent is determined by this flow and tenants' demand for services. There is another flow that is central to our analysis. Each year, there is a flow of housing (I.e., a number of housing units, net of those that wear out, that are added to the stock by developers and builders). In growing communities, such as we have in many parts of Hawaii, this flow is positive and the stock is growing. However, for the purpose of studying the effects of impact fees, we shall initially assume that prior to the imposition of the fees, demographic and economic conditions are such that a zero flow of housing results, so that the stock of housing is unchanging. This benchmark assumption simplifies the exposition by temporarily setting aside the host of normal market conditions affecting the stock, thus facilitating our analysis of the effect of impact fees. Later (under "Estimates of the Long Run Burden Distribution"), our analysis shall be modified again to reflect normal market conditions and allow for community growth. As we shall see, the imposition of fees will tend to change the stock of housing and therefore change its price. As the stock of housing changes, so does the flow of services, and consequently, the rent. These changes In stock take time. Following the enactment of fees, a time lapse insufficient for the stock to change is called the short run. A time lapse sufficient for the adjustment of stock to be complete is called the long run. Effects of Impact Fees on Rents and Prices Our first task is to explain the effect of the impact fees on rent. The developers must pay the fees. Thus, the fees comprise an increase in developers' marginal costs that result in losses. Developers respond by reducing the flow of housing production. However, because the fees are not applied to improvements on old dwelling or the construction of illegal units, they induce such construction, to an extent. This partially offsets the effect of the fees on most new dwelling construction. The net result of both effects is a smaller flow of housing and thus, a reduction in the stock of housing. There is a corresponding reduction in the supply of housingservices,whichimpliesahigherrent. Althoughthefeesapplyonlytonewdwellings,the rise in rent occurs in all dwellings, due to the net reduction in stock. Thus, some of the burden of the fees is passed along to all households as consumers of housing services, regardless of whether they occupy new or old dwelling units. In addition to the losses sustained by developers and the higher rents incurred by consumers of housing services, there are some other noteworthy effects of impact fees. The reduction in housing development and construction implies a smaller demand for such economic factors as labor, land and real capital. This causes temporary unemployment and lower wages, as well as lower rents for capital equipment and developable (I.e., undeveloped) land. At the same time, there is a rise in the rent for the land component of existing housing. The particularfactorserviceswhosewagesorrentswfllbemostaffectedarethemore specialized construction industry services of labor, capital equipment, and especially land suitable for development. The pattern of the above described effects over time is as follows. In the short run, the constancy of housing stock and services ensures that housing service rents are constant. Developers and owners (i.e., of land, labor services and capital equipment) bear the entire burden. In the long run, however, there are 147 three noteworthy effects. First, the reduction in stock and services results in a rise in housing services rent, with its burden on consumers. Second, developers no longer sustain losses, and most of the factors-- thosewith alternativeemploymentpossibllities--no longersufferunemploymentorreducedwagesorrents. Third, the rent on developable land remains depressed. Much of the above explanation refers to housing rents and land rents which are payments for services. Nothing has yet been said about the effects of the impact fees on the prices of the durables--housing and land--that yield these services. Following the imposition of fees, the expectation of rising housing rent tends to be capitalized into a higher housing price. In other words, the expected change In rents tends to concentrate in time on the current owners of housing. There Is an analogous tendencyfor the expectation of a lower rent on developable land to be capitalized into a lower land price. On the other hand, the price of previously developed land will tend to rise. As in the case of housing rent, the rise in housing price applies to old as well as new dwellings. Finally, the rise in price will be roughly proportional to the rise in rent. In view of the above analysis of rents and prices, let us summarize the most burdensome effects of the impact fees in the long run. The rise in housing service rent is clearly harmful to tenants. While It Is also burdensome toowner-occupants as occupants, the burden is more or less offset by thewealth-increasing rise in housing price. Thus, the most serious burdens are those on: (a) future home buyers and tenants, no matter whether they be existing residents or new arrivals; and on (b) the owners of developable land. Estimates of the Lona Run Burden Distribution How long Is the long run? What percentage of thefees is shiftedforward to housing consumers, andwhat percentage backward to landowners, in the long run? Although empirical research on these Issues has not yet yielded definitive answers, we can suggest a range of answers on the basis of housing market studies. Prior to addressing the length of the long run, it will be helpful to modify the earlier analysis to allow for community growth. The longrunislongenoughforthestockofhousingtofullyadjusttoanewlowerlevel reflecting the increase in development costs due to the fees. Of course, this does not necessaNly mean that the new stock will actually be lower than it was at the time the fees were imposed. In the context of community growth, the stock may actually be higher than at the time of fees imposition, because developers are responding to increases in the number of households and other changing market conditions. However, our point is that in the long run, the new stock of housing will have fully adjusted to anew level that is lower than it would have been in the absence of the fees. How long does it take to approach the full adjustment? The only definitive study (Muth, 1960) Indicates that some types of adjustments in the stock are 90 percent complete after six years. However, this study does not take into account the special growth conditions that prevail in parts of the Hawaiian housing market today. In particular, if growth in the number of households is rapid, this tends to offset the effects of the impact fees, and makes the time necessary for stock and rent adjustments shorter. In sum, the long run effects of fees on the stock and all rents will probably be approximated well within ten years, and in some areas of rapid growth, no adjustment period is necessary. In view of the shortness of the long run, we need not be overly concerned about the short run. Thus, in the remainder of the chapter, we shall omit explicit reference to short and long run effects. It will be understood that all effects are long run effects. Our calculations, based on results from other studies, imply that as a result of the impact fees, the buyers of housing units will be paying prices that are higher by 50 to 100 percent of the fees.' (All tenants and implicitly all homeowners will be paying correspondingly higher rents.) The owners of developable land will bear most of the remaining burden in the form of a reduction to the market value of land equal to 0 to 50 percent of the fees. 148 While questions can be raised about the applicability of results ftom other studies to our analysis of impact fees in Hawaii, we shall nevertheless make reference to them. They admit the possibility that the burden may be distributed more towards landowners than towards the buyers of homes and tenants.2 And they compel a cautious conclusion: within the brief period ofunder ahalf-dozen years following the enactment of impact fees, home prices will generally rise, probably by more than 50 percent of thefees, and the prices of developable land will fall, probably by less than 50 percent of the fees. A numerical example wil l not only it lustrate the possible effects on prices of housing and developable land, but also suggest the extent to which rents will change. Suppose that in the absence of impact fees, the price of raw land is $50,000, and the price of homes is $100,000. Further assume that the Impact fees total $3,000, and that two-thirds is shifted forward, while one-third is shifted backward. As a result, the price of land will fall to $49,000, while the price of homes will rise to $102,000. Finally, suppose that in the absence of impact fees, homes rent for $10,000 per year. With the imposition of the fees, the rent will rise in roughly the same proportion as unit prices, to $10,200 per year. Needless to say, these numerical assumptions and conclusions are strictly hypothetical. However, they illustrate one possible scenario resulting from impact fees. Effects of Impact Fees on Homeownership Impact fees also affect the percentage of households that own their own homes. Although the fees have no effect on the tenure decisions of the great majority of households, they do affect some moderate- income households that have opportunities to own as well as rent. To explain what determines a household's tenure choice, It wil I be helpful to set aside, as a separate problem, the household's decision about what quantity of housing service to consume. One can consume any given amount of service by either buying or renting the dwelling, and we want to focus strictly on the buy vs. rent decision. Rented services and awned services are substitutes just as surely as leased and owned autos are. Such housing alternatives are not perfect substitutes--most households probably prefer owned services which feed pride, afford a type of security, and provide investment opportunities that are unavailable to tenants. Although these households may be willing to pay a premium for owner services, we shall set aside this complication to keep the tenure choice explanation simple. This will not affect the results of our analysis. The household's tenure choice is based on a comparison of the household's rent as a tenant and the household's user cost as an owner. The owner's cost of using his dwelling can be treated as the product of the cost of capital and the dwelling's market value. In the simplest case, the cost of capital Is the rate of interest. If the rate of interest is 10 percent, and the dwelling's price is $100,000, then the user cost is $10,000 per annum. (In reality, of course, the cost of capital is complicated by income taxes, property taxes, capital gains and household characteristics that we shall set aside as irrelevant for the purpose at hand.) If a household's alternatives are to rent a dwelling for $10,000 or to purchase and Incur a user cost of the same amount, then it will be indifferent as to choice. As a general rule, except in racially discriminatory housing markets, any household would be able to rent the same dwelling for the same amount of money, say $10,000 per year. However, each owner household has a different user cost of occupying the same dwelling. I n particular, close to the margin of indifferencewhere tenure decisions are made, higher-Income households have lower user costs than lower-income households. This is partly because they can borrow at a lower effective rate of interest. The effective rate of interest takes account ofpoints," second as well as first mortgages, and rates imputable to agreements of sale. Of course, households well below the margin simply cannot obtain mortgage financing from the conventional lending institutions. The higher rate of interest charged to households with lower income includes a risk premium to compensate lenders for the greater probability that borrowers will fail to make timely payments, ultimately leading to foreclosure. The risk premium also depends on the price of the dwelling: a householdwith a given Income 149 i can finance a lower priced home purchase at a lower rate of interest. The household's user cost of a lower priced dwelling would be lower for two reasons: the price is lower and the cost of capital is lower. The effect of impact fees on the fraction of households that own their homes can now be explained. We previously concluded that the imposition of the fees causes a proportional increase in housing rent and price. If the cost of capital were unaffected by these increases, then the rent and user cost would rise proportionately, and households' tenure choices would not change. However, the rise in price relative to the household's income causes a rise in the effective interest rate the household must pay, and therefore a rise in the cost of capital. The user cost of ownership rises relative to rent, and households that were formerly indifferent are discouraged from owning their own homes. Fffe~ts on Reductions in Other Revenues Most of the Impact fees would be used to pay for infrastructure that would otherwise be paid for out of the State and County general and special funds. To the extent that this is true, the Imposition of Impact fees permits a reduction in one or more revenue sources thatfeed the general or respective special fund. (This assumes that the government will substitute the impact fees for the current revenue source or, in effect, return the excess resources to the taxpayers.) The only exception to this rule is in the case of water, where impact fees called facilities fees are already used by Counties to pay for some of the development- amibutable water infrastructure. In this section we explain only the long run effects of reducing the alternative revenues. r a~o~A~x Ise and Personal Income Taxes Impact fees to pay for State-provided water, sewer, road, park and school facilities would permit a reduction in the State's general excise and personal income taxes, which together provide three-fourths of the general fund revenues. Of course, the general excise and personal income tax bases are very large i in comparison with the impactfee base, so the use of impactfeeswould permit only the slightest reduction in general excise or Income tax rates. The excise tax--even that portion that is not on retail goods and services--is mostly shifted forward to consumers; it raises the prices of the taxed goods by most of the tax amount. This is the conventional wisdom among economists.9 The personal income tax is not shffted; it reduces taxpayers' disposable income by the amount of the tax. This conclusion is also conventional. The effects of these taxes are quite diffuse across many goods prices and individuals' Incomes. This is in contrast to the impact fees, which primarily affect housing tenants and first-time home buyers, and landowners. In sum, displacement of general excise or personal income tax revenues by impact fees sufficient to pay for development-attributable infrastructure would potentially reduce the prices of goods and increase disposable incomes generally, while raising housing rents and prices, and lowering developable land prices. The precise real Income redistributive effects, however, are impossible to nail down. Although essentially everyone Is affected in more than one capacity--as income taxpayer, as the buyer of housing or housing services and all other goods and services, or as the owner of land--the net effect will nevertheless be to redistribute the burden of infrastructure across members of the community in complex, unknown ways. Other Taxes Although State and County vehicle fuel and County vehicle weight taxes are currently used primarily to cover the operation and maintenance of roads, they could instead be used to retire bonds thatff Hance road infrastructure. If they become used for this purpose, then impact fees could permit a reduction in these taxes. Consumers of vehicle services now pay a price for gasoline that is higher by the amount of the tax. 150 Neither this tax nor the weight tax paid by households that own vehicles is shifted. However, both of these taxes, when paid by businesses, are shifted to the consumers of the firms' goods and services. Displacement of these taxes by Impact fees sufficient to pay for development-attributable roads could conceivably permit a noticeable reduction in fuel or weight tax rates. The substitution of impactfees would potentially lower the price of vehicle services and goods generally, raise housing rents and prices, and lower developable land prices. If the taxes were used to retire the bonds, their substitution by impact fees would redistribute the burden of paying for highway Infrastructure from consumers of vehicle services and goods generally, to the tenants and buyers of housing, and the users and owners of land. Essentially the same argument can be made regarding impactfees in lieu of user chargesforCounty-provided sewer and water services. Impact fees to pay for County-provided sewer, road, and park Infrastructure would permit a reduction in County property taxes. Propertytaxesonowner-occupied housing are borne by the occupants. Property taxes on rental housing are mostly borne by the tenants, passed along by landlords in the form of higher rents. The amount of property taxes paid by owner-occupants and landlords is roughly proportional not only to their properties' market value, but also to the rent. Thus, the residential property tax burden is borne by housing consumers roughly in proportion to the value of services consumed. In contrast, non-residential property taxes are mostly shifted forvvard to consumers of the firms' products. Thus, the non-residential property tax burden is, like the general excise tax, diffused through increased prices of many products. Although the substitution of impact fees for property taxes will have partially offsetting effects on the burden distribution, there will be some difficult-to-discern net effects. Exportability of Fees Something should be said here about the exportability of impact fees relative to the taxes they would displace. The State income tax is partly exported (i.e., paid bynon-resident owners of Hawaii businesses). Although County real property taxes are also paid by non-resident property owners, the burden is borne by tenants, most of these being visitors, towhom the tax is exported. The State general excise tax is partly paid by visitors when they buy goods here; and by the Federal governmentwhen it pays for construction here. A part of the vehicle fuel and weight taxes are also paid by tourists who rent cars or take motor tours. A similar argument regarding the exportation of taxes can be made over sewer and water us.r fees. (Kamins and Ebel estimated about seven percent of most of these taxes were exported in 1970. However, tourist expenditures in Hawaii have increased since then, and so has non-resident ownership of real property.) Some of the impact fees will also be exported, specifically most of the fees paid by developers of resorts. However, there is one notable reason why impact fees are not exportable as the taxes they displace: they are not deductible in the computation of Federal income taxes. This tends to saddle residents with more of the burden. If we assume that residents are taxed at the marginal income tax rate of 28 percent, then the cost to State residents of $1,000,000 worth of facilities is $1,000,000 in fees, but only $720,000 in taxes. F~onom~fficiencv Laws that make people pay for the costs their actions impose on society induce efficient use of resources. For the sake of efficiency, our taxes and fees should force developers and consumers to compare (t) the benefit they expect to receive from an action with (2) the social cost (i.e., the benefit society will forsake through the developers' or consumers' use of resources that could have produced something else). Then, because we can count on people to take only those actions that yield benefits greater than or equal to the costs they are required to bear, we can count on them to behave in a socially responsible manner. 151 For efficiency, then, developers (or consumers) of infrastructure and housing must pay the marginal social costs of their actions. When private firms (or governmentagencies) develop land, this implies notonlythe commitmentofresourcestoconstructhousingandon-siteinfrastructure,butalso,either: (1)degradation of the services from off-site infrastructure shared with the community; or (2) the commitment of resources to maintain those services at their prior level, probably through the creation of additional infrastructure by government. We assume that when government approves new development, it maintains the level of service and to that end commits resources to the construction of off-site Infrastructure. Since ~ developers'decisionstrlgger this commitment of resources, they should be required to make payments for the development-attributable degradation of off-site infrastructure services. The tying of payments to resource commitment implies payments not only by developers, but by consumers, as well. When consumers use an infrastructure system, they commit additional resources to the operation and/or maintenance of pumps, treatment plants, road surfaces, etc. For efficiency, they should be required to make payments (i.e., user charges) to cover these operational and maintenance costs. This follows from the general rule that efficiency is achieved when fees or taxes are tied as closely 'i as possible to the decisions that irrevocably commit resources. Of course, this ideal is not economic if the costs of monitoring and collecting payments for facility usage are too high. In such a case, some alternative means of financing should be used. In any event, on efficiency grounds, developers should be required to pay for off-site, development-attributable infrastructure, while consumers should be required to pay for the operation and maintenance of user-attributable Infrastructure. The Efficiencv of Impact Fees vs Alternatives Rgolacement of Existing Revenue Sources From the outset, the approach here has been to seek the best (i.e., efficient, fair) means of financing a given infrastructure goal. Therefore, both the efficiency and fairness arguments imply that impact fees, if adopted and implemented, would not supplement but rather, replace not only the facilities components of existing fees and taxes, but also replace the current government practice of exacting off-site facilities and facilities payments on an ad hoc basis from the larger developers in return for permission to develop. This analysis makes this assumption regarding replacement. How should government assign off-site infrastructure costs to induce socially responsible or efficient decisions about the amount of housing to produce and consume? We will now compare impactfees with the current method of assigning costs. Fees vs Alternative Sources of Revenue In the case of schools or school sites and development-attributable parks (those used by local residents), impact fees are more efficient than the general excise or personal income taxes now used. It is difficult to find any Ilnk between decisions to construct school or park facilities and decisions to purchase taxable products or earn taxable income. Rather, governments' commitment of resources is triggered by developers' decisions to develop land to accommodate either a growing community population or the relocation of a stable population. In either of these cases, development may require the costly addition or relocation of school and park facilities. This establishes a link between decisions to induce the construction of facilities and decisions to pay an impactfee. A side issue that should be raised here is that in the case of schools and parks, the number of bedrooms is a better basis for determining the fees than the number of dwellings, because the additional facilities needed are more closely linked to the bedroom count, as a proxy for population and children. 152 In the case of sewer infrastructure, Impact fees are more efficient than the current sources of funds, the most important of which being the property tax. Homeowners and landlords admittedly bear that portion of the residential property tax burden roughly in proportion to the occupants' consumption of sewer services. However, efficiency requiresthatthedevelopment-attrlbutablecostsofadditionaloff-sitemains, pumps and treatment plants be covered by the developers who cause the government to construct them. The property taxis more defensible as a means of retiring debt incurred for upgrading services for the community as a whole. This is because the tax provides a rough sort of link between the costs of upgrading the infrastructure and Its benefits; both are broadly dispersed. In contrast, impact fees are more efficient when it comes to retiring debt incurred for the additional infrastructure necessary to preserve the service level that would be potentially degraded by development. Debt incurred by State and County governments for the construction of roads is sometimes retired out of special funds fed by fuel and weight taxes paid by all vehicle users. The amounts paid are in proportion to use. The link between road use payments by users and road construction needs is strong, and these taxes are a reasonably efficient means of payment for upgrading service levels or maintaining levels that would fall due to increasing vehicle ownership or miles travelled. But impact fees are, in principle, even more closely linked to the particular infrastructure needs created by a new development. By analogous reasoning we conclude that the water facilities fees currently in use are an efficient means of paying for off-site water Infrastructure. Government currently obviates the need for providing and financing selected facilities by exacting them from developers as a condition for permission to develop. These so-called voluntary or "unilateral" agreements tend to have many of the same effects as impact fees, viz. annual housing production is lower, housing rents and prices are higher, etc. This is because exactions and fees are both increases in developers' costs, regardless of whether they are In-kind or in cash. However, there are some notable differences between "unilateral" ad hoc exactions and impact fees that make the fees preferable on efficiency grounds. Efficiency requires that large and small developers alike be made to bear the full social costs of their respective developments. The social costs of the developments are, roughly speaking, proportional to development size. Thus, under an ad hocexactions policy, although government can exact facilities of any size from large developments, It is constrained to exact only small facilities from small developments. Unfortunately, the exaction of small facilities is generally inconsistent with the second requirement of efficiency that the production of facilities take full advantage of economies of scale. Scale economies in roads, sewers, and other types of Infrastructure, imply that service levels can be preserved by a few large facilities at lower cost than a lot of small facilities. The exaction of small (i.e., high cost per service unit) facilities would be wasteful. Fortunately, however, both efficiency requirements can be satisfied by the imposition of impact fees on all developers to pay for the required facilities. First, the total payments made by each developer will be proportional to development size, and can be set ata level approximately equal to the social cost Imposed by the developer on the users of community infrastructure. Second, the impact fee revenues can be used to pay for development-attributable, government-provided, economically sized facilities that take full advantage of scale economies. Thus, impact fees are preferable to "unilateral" ad hoc exactions on efficiency grounds. Moreover, ad hoc exaction costs are determined by discretion, without the use of clear, consistent rules that would relate these costs to the costs of off-site infrastructure necessary to maintain service levels. In the absence of such rules orformulas, we cannot~ven begin to evaluatewhether the `unllaterals"are more or less onerous than they should be to malntain'community service levels. Moreover, the discretionary method unnecessarily creates surprises, raising developers' protect risks. Impact fees provide for a more 153 accountable and predictable, and fairer commitment of developers' resources towards infrastructure to maintain service levels. The per unit fees should when practicable be graded according to location or terrain to reflect different costs of off-site infrastructure construction necessary to maintain service levels. If water or sewer interceptors to more distant locations or certain elevations require more costly pipes or pumps, the fees should be higher to cover these costs. If developments in Windward Oahu require more costly transportation facilities to maintain service levels than development in Kakaako, then higher fees for Windward developments arewarranted to cover the additional costs. When properly graded, the fees can be used to achieve marginal cost pricing of infrastructure in each location, which induces spatially efficient land use. However, it would be inefficient for fees to be graded for political purposes in ways unrelated to differential infrastructure costs. If we charge developers less than the marginal social cost of development-attributable infrastructure, they will tend to build more than the efficient amount of housing and infrastructure. It is "too much" housing and infrastructure in the sense that the scarce resources used in producing the last few units could have benefitted the community more had they been used to produce something else, such as sugar cane or recreational services, for instance. It is difficult for planners, economists and government officials to determine the efficient amount of housing and infrastructure because it requires a comparison of consumers' unknown, subjectively determined benefits from housing with its costs. It would be relatively easy for an open competitive market to provide the efficient amount of housing because consumers would increase housing consumption until marginal benefits fell to the market price, and developers would increase housing production until their marginal cost rose to the market price. OF course, the housing market is neither completely open nor pertectly competitive. State and local government land use regulations, land and labor monopoly elements, and taxes and subsidies relating to housing ali interfere with efficient use of resources. Choosing the proper method of paying for infrastructure can shorten the list of wasteful practices, and begin to unravel the bureaucratic web of regulationsthatinducessomuchwaste. Ultimately, through greaterrelianceonmarketforces,andproper charging for government infrastructure and services, we can arrive at a more efficient amount of housing and Infrastructure. Fairness Under the Benefit Princi~ The benefit principle holds that people who benefit from government-provided facilities should pay for them. Thefirst issue to be settled iswho are the beneficiaries of anincrement ofoff-site development-attributable infrastructure? Our pointof view under the benefit principle is that if a new developmentwould deteriorate the infrastructure service level for established residents, then occupants of the new development should have to pay for an Increment of infrastructure sufficient to maintain the service level. This point of view, which defines "development-attributable," begins with a "club" of occupants of the old dwellings, and requires that occupants of the new dwellings pay a fee to join the club. It establishes "property rights" in the shared facilities of the community and then al lows the occupants of new dwellings to benefitfrom these facilities' services only if they pay for additional infrastructure to maintain the service level. The term "beneficiaries" need not refer exclusively to the immediate facility users or the occupants of the new dwellings. The owners of those dwellings, the developer, and the original landowner are also beneficiaries from the rental or sale of "rights" to use the club facilities. By the way, the argument of the previous paragraph, which is madewith respectto development occupants, also holdsfor developerswho are targeted by the impact fee. In other words, the impact fee on developers can be viewed as a type of 154 user charge--not the normal periodic or per-service unit charge imposed on consumers, but aone-time charge on development businesses. The fairness of impact fees under the benefit principle derives from our assertion at the outset that it is fair to assign "property rights" in the existing facilities to occupants or owners of the community's existing dwellings. Then, for residents or owners of new developments to benefitfrom thesefacilities'services, they must pay for the additional infrastructure necessary to maintain the community's service level. Widespread acceptance of the benefit principle doeg not immunize It from criticism. Earlier in this study we noted how the developers who pay the fees do not bear their ultimate burden; tenants and landlords do. Analogously, the immediate users of facilities are not necessarily the ultimate beneficiaries. For example, some of the benefits of a light rail transit system do not accrue to riders; they accrue to drivers, and to many property owners at both ends of the line and near stations along the way. There is both an incidenceofimpactfeeburden,andanincidenceoffacilitiesbenefit. Unfortunately,wecannotdetermine, with any degree to confidence, who the burdened and benefitted people are. But we can caution those who endorse the benefit principle that the fairness that they desire may not be closely approximated by requiring that developers or any other users pay for the infrastructure. The Fairness of Impact Fees vs. Alternatives Whether impact fees are fairer than other types of user charges is problematic. The fairest scheme is probably one that links Individual consumer payments for facilities to individual consumer use of the facilities over time. This is more precisely in accord with horizontal and vertical equity. (It is also consistent with pay-as-you-gofinancing; see "Other Benefit Principle Arguments"). Such a scheme is surelyfeasible in the case of water and sewer facilities by imposing a monthly surcharge on the occupants of new developments--a charge proportional towater usage. This link between individual paymentsand individual consumer use for occupants of new developments apart from the rest of the community residents cannot easily be Implemented to payfor roads and most parks, however, for political aswell as economic reasons. Impact fees on developers for development-attributable roads and parks are more feasible, and are fair under the benefit principle. Another fair scheme would be to levy new development surcharges for roads and parks on real property tax bills. Certainly, user charges on developers and these other schemes are fairer than the income tax and the general excise tax approach. As stated earlier, our evaluation of impact fees treats them as replacements for the implicit facility components of existing fees or taxes such as water use fees, fuel and vehicle weight taxes, and real property, Income and general excise taxes. Now consider the very limited extent towhich impactfees are warranted If the facilities components of the existing taxes and fees are not eliminated, but instead, continue to apply to occupants of the new developments. If the production of additional facilities to accommodate new developments and maintain the community's specified service level can be achieved at constant average and marginal cost, then simply subjecting new developments and their occupants to the old charges and taxes would be sufficient to finance the additional development-attributable infrastructure. No impact fees would be needed, and the rational nexus would then be in doubt. On the other hand, if the governments' facilities' costs are increasing at the margin, then subjecting new developments and their occupants to the old charges and taxes wil I yield revenues insufficient to cover the costs of new facilities. There is some evidence that as cities grow, some facilities costs necessary to maintain service levels do Increase slightly (Hufbauer and Severn, 1975). If impactfees are structured i solely to cover the difference between (a) facility costs and (b) revenues raised from the new development and its occupants via the old charges and taxes, then they will not comprise a double tax for the same infrastructure. In addition, graded Impact fees, with higher per-dwelling or bedroom fees in areas where the standardswill cost more than the average amounttofacilitate, can be used to supplementthe standard sources of revenue. These constrained uses of Impact fees are consistent with the benefit principle. 155 Our evaluation of impact fees also treats them as replacements for off-site "unilaterals." Properly structured, fees are superior to discretionary exactions on grounds of both horizontal and vertical equity. The use of clear-cut, fact-based formulas instead of discretion will ensure that developers with similar project conditions will pay similar amounts. Substantial ad hoc exactions from small developers have not been politically or financially feasible, but fees on all developers are feasible. Uniform application of the formulas to small, as well as large, developers ensures that everyone pays his fair share. Impact fees are not appropriate under the benefit principle for upgrading the community's facility service level. Since the service increment would be beneficial to new and old dwelling occupants alike, they should share in the payments for upgrading. It would be more in accord with the payments benefit principle to finance upgrading out of community-wide user charges, or at least, taxes on the community as a whole. Other Benefit Principle Arguments It has been argued elsewhere that impact fees are inappropriate under the benefit principle because it is logically impossible to attribute the cost of a shared facility increment solely to a new development. The argument (Hanke and Wenders, 1982) holds that if occupancy of a new dwelling Implies an enlargement of the shared infrastructure system to maintain service levels, the occupant is no more responsible for the enlargement than the occupant of the old dwelling. Because th'e system, including the incremental lane, pumping station, park, etc., is jointly used, it is not possible to make a distinction between the occupants of new and old dwellings. Both are equally responsible for the size and cost of the system, because one cannot allocate joint costs. We agree that it is impossible to allocate joint costs in the cause-effect sense. However, the search for an equitable assignment of those costs need not be restricted by this fact. As a rule of equity, we return to our position of the previous section, and assign incremental system costs to the new development's occupants. This is based on our initial establishment of property °rights" in the shared facilities of the community. It has also been argued that impactfees are appropriate when there is community growth at a rate greater than the real rate of interest, and the infrastructure financing period is shorter than its economic life (Stegman and Snyder, 1986). The argument begins with pay-as-you-go financing as a benchmark (i.e., fees and taxes are collected at a rate sufficient to retire the bonds at the end of facility life). Then, H the cost of infrastructure is spread equally across all (new, as well as old) dwelling occupants, their payments will equal the system's economic cost. This will be so regardless of whether there is growth. Now suppose that the financing period is shorter than the facility's economic life, and there is growth in the number of households at a rate greater than the real interest rate. Under these circumstances, it can be shown that the established residents, who have to incur debt for infrastructure to maintain service standards while accommodating growth, pay more than the economic cost of thefacilities that serve them. Since it is in-migrantstothe communitywho are the beneficiaries ofpre-paid community infrastructure and the cause of the excess burden on old residents, the in-migrants should be required to pay for a share of it at a price equal to its per-household economic value. In other words, each arriving household ought to be assessed an amount equal to the average equity each old or current resident has accumulated in the existingfacilities. However, although such an assessment of arrivals is inaccordwiththebenefitprinciple, it raises some serious legal issues. Since the disproportionate burden on current residents would not occur under pay-as-you-go financing strategies, this inequity is the basis for an argument in support of such strategies at the outset. However, our State and County governments do employ short-term payback strategies (i.e., as opposed to pay-as-you-go financing). Should they, then, consider impact fees as a means of achieving a fairer distribution of infrastructure costs between old residents and arrivals? Stegman and Snyder argue they should, butwe disagree. Do developers' impact fee payments for facilities that benefit new arrivals accord 156 with the benefitprinciple? No, therelsnoclear-cut relationship betweenthefeepaymentsandthebenefits to arrivals. This is because, as a general rule, arrivals do not occupy the developers' new dwellings; established residents do. Therefore, the horizontally inequitable distribution of infrastructure cost burden between old and new residents due to short-term debt payback cannot be equitably remedied by impact fees. Thus, the best solution to this problem in the future is pay-as-you-go. Fairness Under the Abllitv Principle Most of our attention has been devoted to the benefit principle because of its widespread endorsement as a fair rule for spreading the cost of all infrastructure, except for educational and visitor park facilities. Many people feel that ability-to-pay, measured as income is the fairest rule for distributing the cost of education and non-development exclusive parks, not to mention the cost of rental housing subsidies for the poor. Alternative measures of ability are wealth and consumption. Real property, however, Is not a good measure of ability, for it is but one component of wealth. If income is the best measure of ability, then it is fair to tax people having equal incomes equal amounts, and people with higher incomes higher amounts, until the amounts are sufficient to cover the cost of the facilities. Impactfees compare quite unfavorablywith an Income tax as an infrastructure revenue source, under the ability principle. Two illustrations of their inequity will be helpful. First, under the ability principle, developers with different Incomes should pay amounts towards educational facilities that are (say) proportional to their incomes. However, with an impact fee, if these developers all undertake projects of the same size, they will pay the same amounts. This is clearly a violation of vertical equity. Second, developers with identical incomes should pay identical amounts; but with an impact fee they would pay amounts that vary according to project size. I n this case, there is a violation of horizontal equity. One can conceive of other illustrations of the main point that the impact fee violates both horizontal and vertical equity under the ability principle. County vs. State Government In the Introduction, we noted that Counties have provided and financed road, sewer, water and park facilities, and that the State has constructed and paid for road, education and park facilities. All of the Counties have shown preliminary interest in impact fees as a means of financing facilities, and two of them, Hawaii and Maui, have drafted legislation. To date, the State has not taken official action regarding fees. These observations raise the issue of whether government decisions about the provision and (impact fee or other) financing of infrastructure ought to be made at the County or the State level. On grounds of economic efficiency, the Counties should assume full responsibilityfor the construction and financing of road, sewer, water and "local" park facilities. The State should assume full responsibilityfor education and the remaining regional, visitor-used parks. Why is this an efficient division of responsibilities? As a general rule, the closer the level of government is to the facility beneficiaries and payers of fees and taxes, the less likelihood there will be of wasteful facility provisions. The only exception to this rule is when one government provides facilities yielding benefits or nuisances that spill over into another, usually adjacent, jurisdiction. On the mainland, there are sometimes significant road, sewer and water resource and usage spillovers that justify resorting to a higher-than-County level of government. This, however, is not the case in Hawaii, as far'as road, sewer and water systems are concerned. There are spillover benefits associated with some types of parks--not parks used exclusively by a County's 157 population, but parks visited frequently by outsiders. There are also substantial spillover benefits associated with education. Thus, the State should have a role to play in the provision and financing of education and some park facilities. What level ofgovernmentislikelytoprovidethefairestdistributionoffacilitybenefitsrelativetocosts? We have adopted the benefit principle in the case of road, water, sewer and locally-used park facilities. Under the benefit principle, these four types of facilities ought to be financed exclusively by the Counties. Because the beneficiaries of the facilities are local, the costs should be locally borne. Wehaveadoptedtheability-to-payprinciple in thecaseofvisitorparksandeducationfacilities. Under this principle, it is appropriate for the State to bear these costs. Some Counties have populations with higher incomes than other Counties, and under the ability principle, there ought to be some cross-subsidization. Only the State can achieve this. On both efficiency and ability-fairness grounds, the same conclusion can be argued for a State role in the financing of housing to achieve its given objectives, as we shall see in the next Section. III. HOUSING EXACTIONS PROGRAMS Ho ~ my Obiectlves and Means In the Introduction to this Chapter, we called attention to two basic housing objectives. The first is to ensure the availability of adequate and affordable rental housing for low-income households (i.e., to increase their housing consumption). The second is to encourage homeownership for non-high income households; realistically, this means households of moderate rather than low income. This statement of objectives is not exhaustive--planners and officials are capable of listing many others. But these two objectives are basic in the sense that there has been a persistent and widespread consensus regarding their importance. Housing exactions programs can be seen as one of several politicallyfeasible means of possibly achieving the two objectives. These programs can exact housing from any type of development. In the context of residential development, they are called inclusionary housing programs. In the case of resort, commercial and industrial development, they are called linkage programs. In Hawaii, both programs are labelled affordable housing requirements. An exactions program for any particular development is potentially comprised of a number of component requirements and inducements. The specifics differ from one development to the next. They generally require that developers provide a specified percentage of the dwellings for rental to low-income households, or for sale tolow-ormoderate-income households. Of course, all exacted dwellings are new- -none are used. These are some of the development particulars thai can be specified: where the dwellings will lie located; whether the structures will be single-family dwellings, townhouses, or high-rise condos; the number of bedrooms; allowable setbacks; relaxation of cable burial and curb-sidewalk standards. Each exactions program specifies range of rents on dwel lings for lease, and a range of prices on dwellings for sale. These are supposed to be within the reach of households eligible to lease or buy. Eligibility is defined by a range of incomes. Those who buy are sometimes discouraged from speculating by government buy-back provisions intended to eliminate any possibility of capital gains within a specified time period, usually ten years. Governmentsometimesprovidesbondfinancingofinterimlandacquisitionorinftastructurecosts, and even waives the general excise tax as an additional inducement. While tenants and buyers of the 158 exacted dwellings often receive subsidies from government, such as housing vouchers and subsidized mortgage financing, these subsidies are not part of the exactions program, per se. There are other means of achievingthetwohousingobjectives. Afterexplainingandevaluatingtheeffects of housing exactions programs, we shall suggest some feasible alternative methods. The Meaning of Housing Before we can explain the effects of housing exactions programs on the quantity and quality of old and new dwellings, and their prices and rents, it is necessary to establish a clearer view of the housing market than we portrayed in the section on impact fees. Actually, we shall need two variants on this view: one to help explain the quantity and price of durable housing for owners, and the other to explain the quantity and rent of housing services yielded by the housing for tenants. Our new perspective requires a careful distinction between housing and dwellings. A dwelling is simply the structure or part of a structure inhabited by a household. At any point in time, the community contains a large number of dwellings, each with its own set of structural and locatlonal characteristics. Some dwellings are single household structures; others are in multiple dwelling structures. Some are new four- bedroom units; others are old two-bedroom units. some dwellings are in beautiful neighborhoods with good schools and short commutes to job centers; others are not. As time passes, structures age; some are rehabilitated, others destroyed. Some smaller structures are made larger, and some larger structures are subdivided Into multiple dwellings. New structures are built in new locations. Neighborhoods change. Housing, as we use the term here, is an abstract concept useful for conceptualizing and measuring the heterogeneous good that households really want. (See Olsen, 1969.) (Note that in this sub-chapter on Housing Exactions, we utilize a more technical and specific definition of "housing" than in the Infrastructure Impact Fees sub-chapter.) Given the above described complexity, it would be misleading to think of the stock of housing as simply the number of dwellings. That would be like measuring the stock of fruit as the sum total of melons and bananas. Then how shall we meaningfully think of the stock of housing? It will lie instructive to compare two dwellings in a community. The amount of housing in a dwelling priced at $200,000 is surely twice as great as that in a dwelling priced at $100,000. The higher priced dwelling is not necessarily twice as large; it may even be smaller, but may be built with higher quality materials or in a better location. Now, ff the lower priced dwelling were improved, but not necessarily enlarged, so that its price rose to $200,000, thiswoutd double its contribution to the community's housing stock, without changing the number of dwellings. The housing that consumers want is not space alone, but a composite of space and many other attributes. A dwelling's price, therefore, is our best indicator of the quantity of abstract housing it contains, and the sum of all dwellings' prices is our best Indicator of the stock of housing in the community. It is important to keep in mind the distinction between housing and dwellings. Our exposition will explain the effects of housing exactions on the quantity and price of housing, and only then draw implications for the quantity and prices of dwel lings of different types and sizes. Another important concept to understand is that there is but one un'rform price for all housing in a community. If the price of housing is $1,000 per abstract unit, then the buyer of a $200,000 dwelling obtains 200 units of housing, whereas the buyer of a $100,000 dwelling obtains 100 units of housing. Our treatment of the housing services rendered by housing is perfectly analogous: there is only one uniform rent for housing services. If the uniform rent per housing service is $ t 0, and the tenant's monthly payment is $1000, he is purchasing 100 housing service units. In explaining the effects of housing exactions in the services market, we shall focus on the rent and quantity of housing services--what consumerswant--and then draw implicatfonsfor the quantity and rents of dwellings. 159 The Lona-Run Market Mechanism We shall emphasize the long-run effects of housing exactions programs for several reasons. First, the short-run effects are obvious and receive considerable attention in the media, whereas the long-run effects are well hidden from view. Second, as noted in the section on impact fees, the short-run lasts for only about 0-6 years. Third, planners and other officials involved in planning housing and Infrastructure should be more concerned about the lasting and broader effects of government programs. To illustrate the distinction between the highly visible, short-run impacts of a housing program and the less discernible, but more important, long-run effects, compare the short-run and long-run effects of government slum clearance and urban renewal. Such programs used to be premised in large part on the notion that the destruction of slum dwellings would reduce the number of households occupying dilapidated structures. Now, we know better. The immediate(short-run)impactwasindeedsuchareduction. However,theevictedhouseholdsthencreated an excess demand for low-quality dwellings. Gradually, the owners of slightly better than slum dwellings found it profitable to allow their dwellings to filter down to the level of slum dwellings. This down-filtering, or decreasing of the housing content in dwellings, continued until the rates of return on capital invested in all dwellings were approximately equal. (For more on filtering see Ohls, 1975.) Neither clearance nor renewal subsidized housing consumption bylow-income households, nor did they increase the Incomes of these households or reduce thepricestheypaidfornon-housing goods. Finally,therewasnoreduction in the cost of producing housing services. Because these are the only means by which the households could be induced to consume more housing service (i.e., increased housing quantity and/or quality), the former residents of the cleared areas consumed the same quantity of housing service as before, In the long run, they were simply relocated to different, down-filtered dilapidated dwellings. It is quite a contrast between the highly visible short-term impactof slum elimination and the long-term effect of slum relocation following the market's filtering adjustment. (See "Effects of Housing Exactions' for elaboration of the above market phenomenon.) Housing Exactions Programs and Housing Markets Housing exactions programs segment and segregate the market into households with different incomes, and give some household groups access to the exacted housing, while denying other groups that access. Thus, there will be different effects on housing rents and prices for different households. As in the section on impact fees, the exactions' effects of primary interest are those on the rents tolow-income households, and on the prices to moderate-income households. Our analysis will focus on the long-run effects. In the open (i.e., unrestricted, unsegregated) housing marketwhere all households competefor housing, everyone leases at the same housing rent, or buys at the same housing price; (see "The Meaning of Housing" above). The rental and ownership markets are closely linked, and setting aside some details that are inconsequential for our purposes, rents and prices are jointly determined in lock step: if rent changes by 10 percent, so does price change by 10 percent. Any exactions-induced changes in the low-income group's housing consumption must occur through changes in the developers' revenue or cost schedules that affect the stock of housing, and thus, rent to the consumer. (Of course, developers do not rent to tenants, but to keep our exposition simple, we shall not bring builders and landlords explicitly into the picture.) Moreover, any exactions-induced changes in the moderate-income groups's homeownership must occur through changes in developers' revenue or cost schedules that affect the user cost of owner services relative to rent. (Recall that even though rent and price change in proportion, the price change alters the mortgage interest rate, and this affects user cost relative to rent.)4 160 Thus, in an open market, the effects of exactions hinge entirely on developers' production response and its effect on the stock of housing. If changes in developers' revenue or cost schedules cause them to increase housing production, then the stock of housing wil I Increase and rents and prices will fall, inducing more low-income housing consumption and more moderate-income homeownership. Conversely, a decrease in developers' revenue schedules or an increase in their cost schedules will have the opposite effects. Housing exactions programs make the exacted housing available for some households at a lower rent or price, but close the market to others. This creates two separate markets, and another channel through which the favored groups' housing consumption and tenure decisions can be affected. Of course, the effect of the exactions program on the stock of housing contf Hues to be of paramount importance, but now, we must also be concerned about the division of that stock between the two markets, the different rents and prices in them, and the extent to which members of the favored (i.e., targeted) Income groups have access to the exacted housing market. These considerations will be central to the explanation of low- income tenants' housing consumption and moderate-income households' ownership. It will be convenient to divide the components of exactions programs into three types. The first is government requirements that, in the absence of market segmentation or price and rent controls, would increase the developers' cost of housing production. In the absence of production specifications requirements regarding dwelling characteristics, developers are able to minimize per-unit costs of housing production. However, when government constrains the product mix and design freedom by specifying dwelling types, sizes, and locations for reasons beyond public health and safety, then developers' costs rise. The second type of exactions program component is government measures that decrease the developers' cost of housing production. These measures can Include the relaxation of density standards enabling developers to fit more dwellings onto their land. They can relax normal infrastructure requirements that utility cables be buried, and curbs and sidewalks be installed. Government can also provide bond financing of interim land acquisition or infrastructure costs for developers. Government officials can streamline the permitting process for projects subjected to exactions. Finally, the State government can waive developers' and builders' general excise tax liabilities. These measures would all decrease the costs of housing production. The third type of component is government restrictions on competition among consumers in the housing market by requiring lease or sale of the exacted dwellings at specified rents or prices, to specified income groups. As explained earlier, other excluded groups cannot compete with the favored groups, and members of the favored groups cannot compete with each other by bidding up the rent or price. Effects of Hoesing~xactlons Exactions programs can have quite different effects, depending on the program composition, which typically varies from one development to the next. The key effect of a program however, regardless of its composition, is on the stock of housing in the community. Let us defer consideration of the restrictions on competition, and focus first on the stock effects of government-Imposed cost-increasing and cost- decreasing components of the program in an open market. Cost-increasing components reduce the developer's production, and decrease the housing stock below what it would otherwise be. Housing rent and price rise, and developable land rent and price fall. The relative extent of these changes is likely to be the same as those attributed to Impact fees. For example, a $1000 increase in the cost of dwelling production might result in a $750 increase in dwelling price and a $250 decrease in raw land price. The higher rent implies lower housing consumption, and the higher price (and consequently higher user cost) implies less home ownership. 161 Housing exactions programs are supposed to affect the composition, as well as the size, of the housing stock. They are supposed to result in a higher proportion of basic affordable dwellings, as distinguished from the market-preferred dwellings that developers would otherwise produce. The affordable dwellings contain less housing than do the market-preferred dwellings. In our usage of the terms, the affordable dwellings are moderate-sized bundles of housing, whereas the market-preferred dwellings are optimally- sized bundles of housing. Government's specification of moderate-sized bundles for developers to add to the housing stock is supposed to alter the distribution of bundle sizes in the stock. However, as we shall now explain, the proportion of the stock that is comprised of basic dwellings will not change as a result of exactions program specifications. The long run market mechanism that prevents exactions programs from altering the stock mix towards more affordable dwellings is the same mechanism (described earlier) that prevents slum clearance and urban renewal programs from having their desired effect. To understand why the government-specffied creation of new affordable dwellings does not increase the number of affordable dwellings in the long run, it is necessary to look first at the housing market as a whole. The stock of dwellings is malleable: dwellings age and are rehabilitated, they areextended and subdivided, their occupants change and the tenure of occupants changes. The distribution of bundle sizes at any one time depends on the distribution of household size and income, and other factors that are not affected by the presence of exactions. Consequently, when exactions ofmoderate-sized bundles cause a bulge In the middle of the bundle size distribution, then rents and prices of these bundles fall, relative to other sizes, and the owners of such bundles filter their dwellings up or down to lease or sell for a higher return. Thus, the lasting effect of government exactions in an open market would be not only a lower housing stock, but also no change in the mix of dwelling sizes or qualities. The inability of exactions programs to changethemixofdwellingsizesandqualitiesderivesfrom: (t)theirfailuretoaffectthebasicdeterminants of that mix; and (2) massive filtering by owners of both the exacted and the non-exacted housing stock, in the long run. The extent to government's cost-cutting inducements in connection with exactions is critical. if the government makes no concessions, then the stock of housing will fal I enough to raise the price of housing sufficiently to yield enough profits on the optimally-sized dwellings to subsidize the sale of the exacted dwellings at prices below cost. If, as a second possibility, government cuts cost on the production of all dwellings enough to maintain (but not Increase) the housing stock, these cost savings will permit profits on developers' optimally-sized dwellings sufficient to subsidize the sale of exacted dwellingsat belowcost. Finally, a third possibility would be if the government cuts costs only on the production of exacted dwellings, but cuts them enough to permit sale at a price that covers that cost, this will Increase the stock of housing and require no cross subsidy of exacted dwel lingsfrom profits on the optimally-sized dwel Iings. This list of possibilities underscores the indeterminacy of the net effect of the first two types of exactions program components (i.e., cost-increasing and cost-decreasing actions) in an open market. Of course, with exactions, the market is not open, since all exactions programs restrict money-offer competition for the exacted dwellings. These restrictions further complicate the possible outcomes ff the government-determined prices and rents are not low enough to sell and lease all of the exacted dwellings. Whenthissituatlonoccurs,governmentcan: (t)provideadditionalsubsidiestoattracttenantsandbuyers from the targeted Income groups; or (2) relax restrictions on the transfer or use of the dwellings (e.g., permit retention of capital gains to attract more buyers); or (3) raise the ceiling on household income, thus making more households eligible. Finally (4), government can reduce prices and rents unfit the units are sold or leased. We cannot say, in general, which of these possibilities will transpire, or whether the government or the developers and builders will incur the losses. Another possible outcome is that rents and prices will Lx so low that not all households in the targeted groups who demand exacted dwellings will be able to obtain them. If this happens, the dwellings will 162 presumably beallocated on afirst-come, first-served basis. At prices and rents lower than those necessary to clear the market, there will have to be greater cross subsidies from the buyers and tenants ofoptimally- sizeddwellings tothe buyers and tenants of the exacted dwellings. These larger subsidies are only made possible by a still smaller stock of housing that further Increases the price and rent of housing on the open market, and further decreases the price and rent of developable land. What is the effect of an exactions program onlow-income households' housing consumption? It depends on the program composition. Only a fraction of the households in the targeted income groups will occupy the exacted dwellings; the rest of them will continue to obtain their housing in the open market. Consider just one possibility: the exactions program causes a lower housing rent in the closed market, and a higher rent in the open market. Under such conditions, there will be a weak tendency for households in the subsidlzed, closed market to consume more housing, and a strong tendencyfor all, including low-income households, in the open market to consume less. The weakness of the closed market tendency derives from the propensity of rent-controlled dwellings to filter down, and from the immobility of subsidlzed tenants. In other words, some occupants of exacted dwellings may, due to the subsidy, actually consume less housing (and more non-housing) than they would have in the open market; and certainly, tenants in the open market will consume less housing. The likely net effect of such an exactions program is to decrease low-income households' housing consumption on the average. The primary reason for this result is the absence of cost-decreasing inducements to developers sufficientto offsetthecost-increasing requirements and sufficient to maintain the housing stock. Other conVibuting factors could include: (t) liberal eligibility standards permitting some tenants to enter the closed market when they would have rented more housing on the open market; and (2) the difficulty of preventing landlords in the closed market from filtering down their rent-controlled dwellings. W hat is the effect of an exactions program on moderate-income households' homeownership? Again, the answer depends on the program particulars. Only a fraction of the households in the targeted group will come to own exacted housing, perhaps at a price lower than the open market price. The remainder of the targeted group, however, will have opportunities rest/ icted to the open market, and may experience market inequities to the excluded tenant group above. As before, the answer depends largely on the net effect of government requirements and any inducements on developers' costs. These ambiguous, long-term, neteffects of an unspecified affordable housing exactions program are likely to be largely undiscernlble in a housing market responding to population growth, foreign investment, changing tax laws and other influences. They stand in sharp contrast, however, to the highly visible short- term effects: selected real families renting and owning new dwellings. In comparison with the less attractive, hidden, and deferred effects, including the well-dispersed costs, it is easy to see why exactions might be politically popular. Who bears the burden of housing exactions? It depends on the particulars of the program. However, it is likely that most of the costwill be shifted to tenants and first-time buyers of homes throughout the open market. Some of these tenants are low-income households, and some of the buyers are moderate-income households. The remainder of the burden will be shifted mostly to landowners and taxpayers, although some developers may incur losses due to the surprises inherent in such a flexible discretionary policy. Taxpayers will not only have to make up for any general excise tax waivers and service government debt at higher interest rates due to any development financing, but also pay for any losses not borne by developers when exacted housing cannot be sold at planned prices. 163 FfficiencXand Fairness Housing exactions are very wasteful because they replace the market system, with its incentives to produce at least cost what consumers demand, with a bureaucratic system that lacks such incentives. Decisions about where to locate what types and sizes of dwellings will tend to be wasteful because this replacement weakens the decision link between housing benefits and the cost of providing them.8 One example of this waste is the construction of new moderate-sized bundles of housing when equally satisfactory used ones can be more cheaply provided. Another is the use of price and rent controls shown to be wasteful in a variety of well-documented cases (Olsen, 1972; Fallis and Smith, 1984).8 Developers' and builders' decisions with regard to the types and sizes of dwellings and the prices to ask for them, based on a comparison of their own revenues and costs, are economically efficient. Housing exactions are also unfair by almost all of the standards employed in this study. Let us begin with the benefit principle. If we thought that the benefits of the program accrue to the tenants and buyers of the exacted housing, thenwewould probablyfeel itwould be inappropriate to have these people bearthe cost; after all, the purpose is to subsidize them! But who holds this purpose? We began this section with the assumption that government's objectives of helping (1)low-income tenants to consume more housing, and (2)moderate-income households to own their homes have widespread support. In other words, the general population benefits. Itthenfollows, under the benefit principle, that the burden of achieving these objectivesoughttobewidelyspreadoverthepopulation. However, under theabllity-to-payprincipie,this leads to a burden distributed primarily to the upper-income por4ion of the population. Apparently, then, an income tax is the fairest method of financing housing subsidies. On the other hand, M our assumption is wrong and widespread support for additional housing subsidies does not exist after ail, then why is government advocating such subsidies? One thing is clear: there is nothing in the benefit or ability-to- pay principles that remotely suggests that the burden distribution that results from housing exactions is fair. There are some potential horizontal inequities aswell. If the past record is any indication of whatthefuture holds, then treatment of all developers in accord with a consistent rule appears to be unlikely. Also, there may be unequal treatment of households eligible for the exacted housing. Government often sets ambitious subsidy standards and then fails to commit sufficient resources to implement them for all, or even most, of the eligible parties. If the housing exactions program provides substantial benefits for some but none for others due to the small number of exacted dwellings, this can hardly be considered fair. Alternative Methods If housing exactions programs are inefficient and unfair, then what are the best alternative methods for achieving our housing objectives? First, consider the supply-side, cost-saving inducements that can be given to developers. We refer to serious consideration and implementation of a relaxation of zoning constraints, infrastructure standards, building codes, and the permitting process without, of course, sacrificing basic public health and safety standards. Some of the inducements have been included in housing exactions programs, to some extent. But they could even be provided apart from the programs, for all development projects. The effects would include a greater housing stock with lower rents and prices. Whilethisapproachsometimesconflictswithcertainenvironmentalandpublicwelfareobjectives, it affords a broader range of means by which both housing rental and ownership objectives can be achieved, in more efficient and fairer ways than exactions programs. There are also some efficient and equitable demand-side inducements. First, consider an excellent alternative to rental exactions for low-income tenants. Economists (Mayo et. al., 1979, 1980) have made exhaustive comparative analyses of Federal housing programs to benefittenants,including public housing, Section 23 leasing, Section 236 new construction, and housing allowances, such as the current Section 164 8 program. On the basis of these studies, the most efficient method is the housing voucher or allowance. Under such a program the recipient of income earmarked for housing is free toflnd his own dwelling (which meets certain minimum physical standards), sign a lease with the landlord, and make the monthly rental payment. A voucher program can be made fair by sharply targeting eligible tenant groups at the lowest income levels consistent with government's commitment of resources, so there will be equal treatment of similar households. This program can be funded out of the State income tax, consistent with the ability- to-pay principle. A promising demand-side alternative to homeownership exactions is a special personal Income tax credit. This approach would modify the State income tax so as to couple additional assistance in the early years of homeownership for first-time buyers with lower lifetime tax advantages. Struyk and Tuccilb (1983) propose such a plan that affects only first-time buyers, and leaves current homeowners unaffected. It allows thefirst-time buyers amortgage-interest-based tax credit that declines over time, instead of Interest deductions. The tax advantages of our current interest deductions are greater for households with higher incomes because of (1) the progressive nature of the income tax, (2) the high total deductions threshold for itemized deductions, and (3) the higher demand for housing services and homeownership by these households. The credit, therefore, Is fairer than our current interest deductions, on ablilty-to-pay and horizontal equity grounds. 165 References Ebel, Robert D. and Kamins, Robert M., Who Pays Hawaii's Taxes? Social Sciences and Linguistics Institute, University of Hawaii(Manoa), Honolulu, HI., 1975. Fallis, George and Smith, Lawrence B., "Uncontrolled Prices in a Controlled Market: The Case of Rent Controls", American Economic Review, pp. 193-200, Vol. 74, 1984. Hanke, Steve H. and Wenders, John T., "Costing and Pricing for Old and New Customers', Public Utilities Fortniahtiv. pp. 43-47, April 29, 1982. Hufbauer, G. C. and Severn, B. W., "Municipal Costs and Urban Area", Jo~!rnal of Urban Economics, Vol. 2, pp. 199-211, 1975. Mayo, Stephen K., "Theory and Estimation in the Economics of Housing Demand', Journal of Urban Economics, Vol. 10, pp. 95-116, 1981. Mayo, Stephen K., Mansfield, S., Warner, D., and Zwetchkenbaum, R., "Housing Alowances and Other Rental Housing Assistance Programs--A Comparison Based on the Housing Allowance Demand Experiment, Part 1: Participation, Housing Consumption, Location, and Satisfaction", Abt Associates, Cambridge, Mass., 1979. Mayo, et al, "Housing Allowances and Other Rental Housing Assistance Programs--A Comparison Based on the Housing Allowance Demand Experiment, Part 2: Cost and Efficiency", Abt Associates, Cambridge, Mass., 1980. Muth, Richard F., "The Demand for Non-Farm Housing", in The Demand for Durable Goods (Arnold C. Harberger, ed.), University of Chicago Press, Chicago, 1960. Ohls, James C., "Public Policy Toward Low Income Housing and Filtering in Housing Markets", r I llrhan Economics, Vol. 2, pp. 144-171, 1975. Olsen, Edger O., "A Competitive Theory of the Housing Market", American Economic Review, Vol. 59, pp. 612-622, 1969. Olsen, Edgar O., "An Econometric Analysis of Rent Control", Journal of Political Economv, Vol. 80, pp. 1081-1100, 1972. Rose, Louis A. and Lowry, K., "Developer Infrastructure Contributions--The Honolulu Experience", in Ibg Imoact of Fiscal Restraints: Alternative Financing by Localities (ed. Arlo Woolery), Lincoln Institute of Land Policy, Cambridge, Mass., 1982. Smith, Barton A., "The Supply of Urban Housing," Quarte~y Journal of Economics, Vol. 90, pp. 389-406, 1976. Snyder, Thomas P. and Stegman, Michael A., Payinq for Growth, Urban Land Institute, Washington, D.C., 1986. Struyk, Raymond J. and Tuccillo, John A., "Defining the Federal Role in Housing: Back to Basics", Journal of Urban Economics, Voi. 14, pp. 206-223, 1983. 166 U.S. Supreme Court, Nollan v. California Coastal Commission, 55,107 S. Ct. 3141, 97 L. Ed. 2d 677, 1987. 167 Footnotes to Text The author would like to express appreciation to G. Kem Lowry, Associate Professor with the Department ' of Urban & Regional Planning and Richard Pollock, Associate Professor with the Department of Economics, both of the University of Hawaii at Manoa, for their helpful suggestions in the preparation of this chapter. 1. Theserangesofburdendistributionarebasedonwhateconomistscallpartialequilibriumanalysis, and on rent and price elasticities of demand and supply estimated ftom observed mainland housing market responses to market-wide disturbances. To illustrate the calculation of the fee incidence, assume demand: 0=ao+a~XP a~<0 and supply: where O =quantity P =price gross of impact fee T and all variables are in logs. Solving for P and differentiating yields where ar =price elasticity of demand b~ =price elasticity of supply Several estimates of a~, summarized by Mayo (1981), are around -.7. The very few published estimates of b ~ are less reliable. The estimate most relevant to our study is Smith's (1976) figure of -5.27. Using these two estimates we obtain dP/dT = .88 (i.e., 88 percent of the fee is shifted forward to the buyer). While this is the best estimate we can make, we cannot be confident regarding its applicability to impact fees in Hawaii. That is why we conclude, more conservatively, that 50-100%of the fee is shifted forward. In the long run property rents are proportional to property prices. It can be shown that rents will therefore increase by the same percentage as prices. 2. Our application of the other studies' results warrants two caveats. First, In Hawaii relative to the mainland, housing consumers and developers are probably both less sensftive In their respective consumption and production responses to rent and price changes. The relative lack of developer response to housing price increases is a particularly Important difference between here and the 168 mainland, and it tends to distribute more of the burden to the landowners. This effect on the burden distribution is probably offset to some extent by residents' stronger tendency to stay in Hawaii in spite of higher rent. Second, our application of these elasticities to analyze the effects of a less than market-wide disturbance biases our results. In particular, because impact fees exempt home improvements and illegal second units, the burden is shifted more towards landowners and less towards consumers than our initial calculations suggest. 3. This conclusion is conventional among economists who employ partial equilibrium analysis. In their 1975 partial equilibrium analysis of Hawaii State and County taxes, Kamins and Ebel assume that 100 percent of the excise tax is shifted forward. There is some controversy raised over this, however, by those who employ general equilibrium analysis. 4. See the previous section subtitled, "The Effects of Impact Fees on Homeownership." 5. Benefits to buyers of new housing accrue to developers in the form of housing sales revenues. Developers have strong incentives to provide the types and sizes of dwellings that consumers will pay for, so long as they can cover the costs of providing those dwellings. It Is the developers' quest for profit, which is his revenue minus his cost, that links buyers' benefits to the costs. In contrast, government officials neither receive monetary benefits nor bear monetary costs that result from their specification of the types and sizes of dwellings to be built. Consequently, they have weaker incentives and looser links between benefits and costs. 6. Waste associated with price and rent controls is primarily due to the responses of developers to thelowerpriceandlandlordstothelowerrent: theyreducetheproductionofhousingandhousing services, respectively, below the levels that would otherwise prevail. This tends to channel productive resources (land, labor, and capital) away from housing and instead, towards other goods of potentially lower value to the community. 169 170 CHAPTER 5 Impact Fees and Housing Exactions Programs: Conclusion & Commentary by Dan Davidson I. INTRODUCTION This chapter is entitled both Conclusion and Commentary to make it clear that I am adding my editorial voice to those of the other authors. Preceding chapters have featured a discussion of impact fees and housing exactions from planning, legal, and economic perspectives. Equally important, Chapter Two allowed many of Hawaii's planning and housing officials to talk about their respective Infrastructure and housing needs and how they intend to try to meet these needs. This chapter will attempt to pull these pieces together to see if there is common ground from which to proceed toward adopting Hawaii policies on impact fees and housing exactions. The authors of this report and the public officials interviewed for the project all agree, with varying levels of enthusiasm, that properly structured and properly Implemented impact fees can represent an effective and fair way to help finance infrastructure that would accommodate growth in our State. The critical issue for Hawaii will be the extent to which the public sector accepts impactfees as a substitute for, rather than a supplement to, ad hoc negotiated exactions. The issue is far from resolved, and its resolution will determine whether impact fees contribute to a fairer, mae predictable system or merely become another exaction levied on the developer. Regarding housing exactions, the authors of this report are much less supportive. David Rae finds them to be Ineffective from a planning perspective, while Lou Rose considers them economical ly inefficient and unfair. Ben Kudo raises a number of issues relative to the legality of such housing programs. In sharp contrast, housing exactions are generally supported by the public officials we interviewed. Since the 1970's, most large residential and resort development projects in the State have participated in some form of mandatory housing program. In fact, in 1987, the State Land Use Commission made front-page news by increasing the previously routine 10-15% housing set-aside to a 50% requirement for Oceanic Properties' Mililani Mauka project in Central Oahu. At the same time, "affordable housing" was redefined by the State to Include a broader range of incomes: so the requiremeniwas not quite as dramatic as it first appeared. Similar housing conditions have beenlimposed on subsequent projects requiring State Land Use Commission redesignation from agricultural or conservation to urban. Housing exactions are thus 171 firmly established as de facto "policy" in Hawaii. However, regardless of the terms, the question remains whether such housing requirements are the best policyto achieve affordable housing. We do notthink so. Later in this chapter, the views of Rae, Kudo, and Rose on both impact fees and housing exactions programs will be summarized, along with my own. But before this, and so as to place the conclusions in better perspective, four other topics will be discussed: t) a summary of existing exactions policy, using Oahu as an example; 2) a summary of the attitudes of our interviewed public officials towards exactions; 3) a discussion of the "right" versus "privilege" debate with regard to land development, and why the implicationsareimportanttounderstandingexactions;and4)anotherviewpointontheNollanv California Coastal Commission United States Supreme Court decision. II. AD HOC EXACTIONS As defined in Chapter 1, "exactions" include all manner of things that are compelled to be given or carried out by a developer as a condition of a project's governmental approvals. Unlike some jurisdictions, which apparently have gone from very limited subdivision requirements in the past straight to Impact fees systems, major projects in Hawaii for the past decade or so have been paying for or providing their fair share (and possibly more) ofdevelopment-attributable public facilities through ad hoc exactions systems. An understanding of how such a system works is important, especially if impact fees are ever to replace all or a portion of negotiated exactions. The"unilateralagreement"used on Oahuprovidesaclearillustrationofconditionalzoning. (See definition in Chapter t . A unilateral is applicable at the time of rezoning. It contains the entire exactions "menu" for a project, as determined by the Honolulu City Council. One of the fundamental distinctions between conditional zoning in any form, and an impact fee system is the timing of the exaction. The impact fee is imposed much closer to actual construction (generally final subdivision approval or building permit). Moreover, it applies to all development projects, not just those that happen to require a zone change, and not just large residential or resort projects. Impact fees cast a broader net. On Oahu, the development conditions that will ultimately form the unilateral first appear when the City Department of Land Utilization issues its report to the City Planning Commission. SometimesthePlanning Commission (on Oahu, an advisory body to the City Council,) will recommend changes to the conditions, or the addition of new conditions in response to public hearing testimony. Finally, the City Council, after additional public hearings, will negotiate the final conditions with the zone change applicant. The conditions will then be drafted in contract form, signed by the applicant, and recorded in the State recording system. This last step is important because it means that the exactions "run with the land," as restrictive covenants. A subsequent purchaser of the property or of the development rights is bound by the conditions in the unilateral. Whattypes of exactions are encompassed by a unilateral? Thefollowing represents requirementsthatmay be imposed depending upon the nature and the size of the development: • Satisfy Board of Water Supply's requirements for necessary water source, reservoir and distribution at developer's cost. • Seweraoe. Payallfees,chargesorassessmentsrequiredfortheexpansionofoff- sitewastewater treatment facilities needed for project. • Meet statutory requirements of City Park Dedication Ordinance, plus through negotiatedexactions, dedicate additional land, and/or provide additional private parks. 172 • Child Care• Dedicate land or provide commercial space for child-care facility. • Inclusionary Housing. Provide a percentage of units in the project for sale or for rent to households of low/moderate income. Sometimes payment of money or dedication of land In Ifeu of the housing set-aside have been accepted. • TransDOrtation Improvements. Various, including: a. Dedication of land and/or payment of fees for road widening. b. Signalization of Intersections. c. Total or partial funding of freeway Interchanges adjoining project. ~I d. Pedestrian overpass, sometimes several miles from project. I' e. Implementation of transportation system management program, ' including dedication of land for park'n'ride facility. • Job Training. Establish job-training program in connection with resort projects. • Other Dedications. Provide land for beach access, hiking trails, school sites, government facilities such as police or fire stations, archaeological research, public parking, and wildflfe sanctuaries. Unllaterals for projects that previously required State Land Use Commission redesignation generally restate or include by exhibit the conditions that were Imposed by the Commission. While the unllaterals used on Oahu may be the most elaborate system, large developments in Neighbor Island Counties also, as a routine practice, face substantial exactions. The Maui Planning Commission, for example, requires resort projects to provide one unit of rental housing for every six resort units, as part of the Special Management Area permit process. Extensive sewerage and transportation requirements are also becoming the norm in all Counties. Thus, k is against a Statewide framework of ad hoc exactions that the fairness, legality, and effectiveness of impactfee programs and statutory inclusionary housing and linkage fees must be measured. III. HOW HAWAII OFFICIALS VIEW DEVELOPMENT EXACTIONS. The interview portion of this Report (Chapter 2) illustrates the extent to which development exactions are seen by public officials as absolutely necessary iF growth is to occur.' There is broad agreement among •Thoseintsrviewsdwere: Harold S.MesemO}O,Dlrector, Office of State Planning;JosepAK_Conant, Executlre D/rector, State Housing FJnance and Development Corporatfon; Done/d A. Clegg, Chief PlannJng Officer, City 8 County of Honolulu; Mlchas/ Moon, Director of Housing 6 Community Development, City d County of Honolulu; Christopher L. Hart, Director of Planning, County o/Maul; Albert Lono Lyman, Director of Planning, County o/ Hawaliand TOm Shigemoto, Director o/Planning, County o/Kauai. 173 those interviewed that development should pay for itself in terms of infrastructure. While there is no disagreement over the need for affordable housing, there are differences about how much the private sector should provide and what types of development should trigger it. The requirement of rental or employee housing in connection with resort development is the easiest for the officials to support, especially on the Neighbor Islands where one large resort by creating jobs will also create additional housing needs. Harder to justifyfor some, however, is an affordable housing set-aside in connection with residential development. Don Clegg and John Whalen both question the rationale for such a requirement, seeing it more as a custom that has developed, rather than as a strongly defensible or fair practice. Clegg, AI Lyman, and Chris Hart all mention project viability as a concern, in terms of exactions. Clegg is particularly concerned that the recent State Land Use Commission affordable housing requirements may result in projects being abandoned. The exactions process itself is definitely a concern to the public planners. All are looking for more predictabilityandfairness. TomShigemotosupportsanimpactfeeordinanceforKauaibecausehethinks it will more equitably assess developments. Harold Masumoto agrees: "I do think the impact fee system is or can be fairer. I think more equity in the system than the ad hoc system we have now is desirable." The officials were asked who ultimately pays for exactions (landowner, developer, or consumer), and who should pay for exactions. Shigemoto, Masumoto, Clegg, and Hart all answered that exactions are passed along to the consumer in terms of higher home prices or rents for homes, or higher room rates for hotels. Others were less categorical, suggesting that either the developer or the landowner may absorb some of the costs. There was not much substance, however, to the answers to the question of who ultimately should pay the costs of exactions. The general notion was that the developer, the new homebuyer, the government (taxpayers) and the visitors (in the case of resorts) should all contribute in some fashion. IV. GOVERNMENTAL ATTITUDE TOWARD DEVELOPMENT: A'RIGHT' OR A'PRIVILEGE' Existing conditions show us that Hawaii is a strong exactions State. Whether our various exactions go too far is a matter of opinion that may depend on whether you consider land development to be a right possessed by the landowner or a privilege that the government grants or denies depending upon the circumstances. The answer, of course, lies somewhere in between. The really important issue is how different the mind- set of the "right" group is from that of the "privilege" group. Many exactions issues are answered quite differently depending on which group you start from. The historical framework is important. David Rae and Ben Kudo have both discussed the "first generation" of land use regulations. During this approximatelyforty-year period beginning in the 1920's, zoning and subdivision laws in the United States governed the uses of land and the provision of on-site infrastructure. There is no question that an owner possessed a right to develop his property during this period, subject to reasonable regulations. Over the last fifteen to twenty years, the reasons for and the nature of zoning and subdivision controls have increased dramatically. What Kudo calls the "Planning Era" began. Urban design, growth management, environmental protection, and agricultural preservation are some of the planning goals that became central to this "second generation" of land use regulations. Concurrently, the "right" to use one's property began to diminish. Supportedbycourtcasesupholdingboldgrowthcontrolprograms,manyjurisdictionsbegan to view land development as a governmental grant of power--a privilege to be bestowed. 174 Which brings us back to development exactions. If a governing body believes that it is granting a precious privilege to a landowner by zoning and subdividing his land, then it is pertectly reasonable to demand whatever the market will bear in terms of exactions. If, on the other hand, the government body believes that a landowner possesses a limited right to develop his land in the absence of good reasons to prohibit it, itfollows that the exactions should befitted more to the impact of the development and less to what the exactions "market" may l1e at the time. Private property rights were resoundingly upheld by United States Supreme Court Justice Antonin Scalia in his 1987 majorityopinioninNollanv.CaliforniaCoastalCommission.' Scalia,togetherwiththemajority of the Supreme Court, clearly comes down on the side of "right," and not "privilege." V. SIGNIFICANCE OF NOLLAN CASE Before proceeding to the final subchapters on housing exactions programs and impactfees, it is important to take another look atthe previously mentioned jJollan case. Ben Kudo has already provided an excellent legal analysis of this 1987 U.S. Supreme Court case (see Chapter 3, Pages 107 to 110.) Kudo concludes thatwhile the Nollan decision represents awarning that "exactions based on inexact perceptions or simple desires will no longer be tolerated," he believes that impact fee legislation drafted to meet the traditional rational nexus test will also satisfy the requirements of the Nollan case. My purpose here is not to provide an alternative legal analysis of the case; I could not in any event, because I agree with Mr. Kudo. Instead, my goal Is to present more of a developer's view of Nollan, and to explain how it may be of immediate practical value. Other recent U.S. Supreme Court land use cases have left so many questions unanswered or have raised so many new ones, that a developer would be hard pressed to make any business decisions in reliance upon them. This uncertainty is good for the seminar business. All of us have felt compelled to listen and even contribute to the informed speculation at such meetings about matters such as what constitutes a taking of property, or how many variances should be applied for prior to litigating, or whether it is permissible to downzone a resort property to a golf driving range. The list is endless and very stimulating. None of It, however, is particularly illuminating to companies facing development decisions involving millions of dollars. Nol Ian, however, is different. It is a development exactions case that preaches one simple but critical truth to government, namely, THOU SHALT NOT OVERREACH. A system using ad hoc negotiated exactions invites overreaching. This is why both the developer and the public official should keep a copy of the Nollan decision on the negotiating table. Nollan does not discourage good planning, nor does it prohibit tough exactions. What it does do is penalize lazy planning and unfair exactions. The Nollan test is not terribly complicated. The Court simply says that any condition imposed must: I) substantially advance a legitimate public purpose or need; and 2) be reasonably related to the burden created by the development. z If these requirements are not met, the exaction must be invalidated, according to the Court, as "an out- and-out plan of extortion." This does not mean, however, that the government is powerless in such circumstances to advance Its programs. The Court makes it clear that the California Coastal Commission (the defendant in Nollan) is free to continue its comprehensive planning "but'rf itwants an easement across the Nollans' property, it must pay for it." 3 175 VI. HOUSING EXACTIONS PROGRAMS It is no mystery why affordable housing is such a significant issue in Hawaii. According to the Bank of Hawaii, only 44.1 % of Oahu's residential units are owner-occupied, compared to the national average which is ± 63%.~ In t987, the average price of a new single-family home on Oahu climbed to almost $164,000.5 For the first half of 1988, the median sales price for Honolulu single-family home resales rose to almost $200,000.5 Affordable rentals on Kauai and in Maui and Hawaii County resort areas are difficult to come by. The rental vacancy rate on Oahu was 2.3% in 1986.' Given these facts, there Is widespread agreement that Hawaii needs more affordable housing. The issue, however, over which there is no consensus, is how best to accomplish this objective. Based on the information provided in this report, housing exactions programs are definitely notthe answer. David Rae, in his Planning Chapter, points out that such programs may actually decrease rather than increase housing production. Professor Rose, inhisrigorousandchallengingEconomicAnalysisChapter expands upon this point. According to Rose, two different housing markets are created when housing exactions are imposed: the small, closed "target group" market, comprised of a few favored households, and the open market where the majority of the need group remains, and have to compete for higher- priced, but less available housing. In other words, in the absence of significant cost-decreasing inducements to developers such as density bonuses, below market financing, or permit processing exemptions, the costs of the housing exactions wil I be shifted to the majority of consumers who are In the open market. There is evidence, however, that even development inducements may not lower costs sufficiently to pay for below-market housing. For example, even with permit exemptions that may save several years of planningtime, plustax and financing advantages, the State's Kapolei Village project on Oahu and the City of Honolulu's West Loch project both plan to include 40% market housing so that the prices charged for the market units can include across-subsidy for the affordable units. Professor Rose points out that only a fraction of households within the targeted income group will come to live In the dwellings built as a result of exactions. This is because housing exactions result in less housing being produced in both the open and closed markets. The rest of the targeted group will compete in the open market for housing. Based on this scenario, Rose concludes that: "The likely net effect of an exactions program is to decrease low-income households' housing consumption on the average." For the same reason, homeownership opportunities for many in the target group may actually be restricted, rather than enhanced, by the housing exactions. The key problem is the negative effect that exactions have, in the absence of sufficient inducements, on costs and prices in the open market. On the Maf nland, this phenomenon was labeled by one commentator as "the irony of inclusionary zoning."5 A few households are helped in a very visible fashion, by such programs, but the net effect, which is harder to see, is negative, both for the general consumer of housing and for the targeted-income group. Rae and Rose both recommend against housing exactions programs. Rose believes that implementing a system of price controls, which housing set-asides amountto, may only increase the high costof housing in the open market. Ben Kudo, who is an advocate of impact fees, finds housing exactions to be much more problematic, legally, than impact fees. The key legal issue presented by housing exactions is the Nollan causation question: What is the relationship between the condition imposed--affordable housing- -andthe development project? There are many who do not believe that residential development causes a need for affordable housing. As John W halen states in his interview regarding residential projects: "They don't create a need for affordable housing. They are housing." 176 There is no simple answer as to whether housing exactions programs are legal. Court cases have gone both ways. Requiring employee housing or low/moderate-income rental housing In connection with a resort project located in an areawith limited housing opportunities perhaps comesthe closestto meeting the traditional rational nexus test discussed by Ben Kudo. In such circumstances, the jobs created by the project also create a need for housing. Even in this instance, however, an argument can be made that using the increased State and County tax revenues from the resort to remedy the community-wide problem of affordable housing represents a better approach. Both David Rae and Ben Kudo discuss the New Jersey "Mount Laurel" cases in which the New Jersey Supreme Court determined that Mount Laurel was guilty of "exclusionary zoning." The community allowed only large-lot, single-family homes, which effectively precluded lower-priced housing opportunities. The NAACP brought suit and prevailed on the exclusionary theory. The same economic integration theory might be used to defend housing exactions in Hawaii, but the facts are not comparable. It is the basic lack of housing resulting from overly restrictive land use policies, not exlusionary policies, that accountfor Hawaii's high home prices. Interestingly, the New Jersey Supreme Court in °Mount Laurel II" ordered New Jersey municipalities to "remove all zoning and subdivision restrictions, and exactions that are not necessary to protect health and safety" in order to create opportunities for low income housing.° The Court also instructed the New Jersey municipalities to "overzone" land i.e., make more land available for apartment use thanwas projected to be needed to create a greater Iiklihood of producing sufficient housing.10 Neither of these aggressive housing strategies have been attempted by Hawaii jurisdictions. Does a preferred alternative to housing exactions programs exist? The answer is yes. More land needs to be made available for housing. In 1987 the State Land Use Commission, at the request of the State Administration, began implementing this policy by approving major redesignations of land from the State Agricultural and Conservation Districts to the State Urban District. This represents the first step toward correcting what First Hawaiian Bank's Chief Economist, Dr. Gregory G. Y. Pai, has called the "skewed distribution of land use in Hawaii."" In a recent issue of First Hawaiian Bank's "Economic Indicators," Dr. Pai points out that Urban land comprising only 3.7%of Hawaii's total land, paid 93.2% of the real property taxes in fiscal year 1987. There is a clear need, in his view, to convertAgricultural land to urban uses since 83%, or 1.6 million acres, of the lands designated Agricultural by the State are not under cultivation.'Z Dr. Pai believes that this conversion will: 1) broaden the tax bases; 2) help to bring down the cost of urban land; 3) encourage the private production of affordable housing; and 4) lessen the need for governmental intervention In the provision of housing.73 It should be added that the best land for urbanization is often the best agricultural land. Urbanizing land that isill-suited for either agriculture or housing will not produce the results Dr. Pai sets forth. Some hard choices need to be made. Pai is not the only HawaiieconomistwhoiscriticalofHawaii'srestrictivelai,~iusepolicies. The remarkable "toning, Monopoly Power and Land Use" article written by Bank of Hawaii Associate Economist, Dr. Walt M. Osman, provided the first critique in recent years on this issue." Based on his research, Dr. Osman concluded that the State Land Use Commission decisions over the years have severely restricted the supply of urban, developable land on Oahu, leading to high land prices and an Insufficient supply of housing. Like Dr. PaI, Dr. Osman recommends converting more land to urban use in order to bring down land prices and produce more housing. It is unfortunate that the current State Administration's positive attitude toward urbanizing a portion of 177 Hawaii's agricultural lands for housing projects is mixed with a punitive attitude (i.e., excessive housing exactions) toward private housing development. Creating a regulatory system that makes use of rather than frustrates, the dynamics of the private housing market remains the key to producing affordable housing. Competition rather than compulsion will lead to more positive results. VII. IMPACT FEES Unlike housing exactions, impact fee programs receive considerable support from the authors of this Report. They are seen as vastly preferable to ad hoc negotiated exactions from the planning, legal, and economic perspectives. As David Rae states, "...impact fees can be constructed so that they are both pro-planning and pro- growth. The land use plan is essentially tied to a public facilities plan. If properly implemented, facilities are thus constructed in a timely manner to accommodate planned growth." Ben Kudo's analysis of impactfees is actually much more than a legal analysis. It is also a comprehensive planning guide and draftingmanualforpublicofficialsonhowtowriteanimpactfeeordinance. Kudo also emphasizes good planning in his review. Unlike ad hoc exactions, which can thrive in the absence of a plan, effective impact fees support all the benefits of growth, while providing a mechanism to meet the public facilities demands caused by development. The operative principles of impact fees have evolved to an extraordinary degree from court cases. This is in contrast to other planning concepts such as inclusionary zoning that have received only limited judicial scrutiny. "Rational nexus" is a legal test, yet it is also the driving force of planning behind impact fees. In fact, one of the real advantages to government of impact fees, over other exactions, is that the rules are clear, and if they are followed, the endresultwillbelegal. Jurisdictionsthatengageinsubstantial ad hoc negotiated bargaining with developers realize, or should realize by now, that they are flirting with illegality. The Nollan case underscores this reality. Ben Kudo and Lou Rose both emphasize another advantage of impact fees: developers are treated equally. Under conditional zoning, onlythose developers requiring rezonings are exacted. Others, whose developments may have as substantial an impact on public facilities as the rezoning applicants, pay no exaction because government lacks the opportunity to make the "hit." Impact fees correctly focus on development, since it is development, not zoning, that impacts upon public facilities. For example, a developerbulldingl,OOOUnitsandadeveloperbuildingl0unltswilleachpaysewerimpactfees. Nobody, as Don Clegg puts it, "gets a free ride." Professor Rose calls this horizontal equity: those In similar circumstances (i.e., housing developers), are treated equally. Of course, the 10-unit builder wil I pay only a fraction of the amount assessed against the large project. This is because 10 units will have only ± 1 %of the impact upon sewagefacilities that 1,000 unitswill have. Lou Rose calls thisvertical equity: those in different circumstances (i.e., large builder versus small builder), are treated differently. The final major virtue of impact fees that is endorsed by both Kudo and Rose is predictability. If a system is properly implemented, a developer can ascertain in advance the amount of the fee for transportation, water, etc. This eliminates the big surprises that can occur atthe late stages of negotiated exactions. The developer can do a more efficient job of project planning when the costs are known early. Equally important, the government can make sure its capital facilities planning is keeping pace with the development projects. 178 Limitations of Impact Fees There are, of course, definite limitations tothe use of impactfees. Theyare a sourceof capital, nota magic cure for all planning ills. Impactfees are effective only if the political leadership exists to make the concept work. As pointed out by David Rae, impact fees are subject to both misuse and overuse. Ben Kudo's section on drafting impact fee ordinances covers the misuse issues. One fundamental rule is that impact fees are not to be collected and used to correct existing facility deficiencies. A second fundamental rule is that development can be assessed its fair share and no more, of the cost of public facilities, (i.e., development-attributable costs). A third fundamental rule is that all developments pay. Government- sponsoreddevelopmentsforexample,impactpubllcfacllities. These projects, including large affordable housing developments, should not be exempt from the payment of impact fees. The overuse of impact fees is a major problem in some jurisdictions. The Urban Land Institute's Development Trends 1988 includes a very instructive example of what happened in the Washington D.C. suburban area of Anne Arundel County, Maryland. Working with very reputable consultants, the County proposed a $1,616 per single-family unit road impact fee and a $3, 204 per single-family unit school impact fee. The development community, in turn, hired Its own experts and criticized the fees on three points: 1) failing to recognize property taxes paid by new development; 2~ calculating the fees on an unreasonable basis, and 3) lacking programs to correct existing deficiencies. s Michael Stegman, a leading authority on Impact fees, criticized Anne Arundel County as one of the "jurisdictions whose political leaders and taxpayers are looking to impact fees as a substitute for general properrytaxes and declining state grants-in-aid."1Q Fortunately, a compromise proposalwas adoptedwith substantially reduced fees plus a matching fund from general revenues to help fund new projects. It also needs to be remembered that impact fees are costs to the developer that will in part be passed on to the housing consumer. In this regard, Impact fees are no different from ad hoc exactions. The "incidence" debate as to who ultimately bears the burden of impactfees is on-going, and data is lacking. Professor Rose believes that at least 50% of the costs are passed through to housing consumers. Others believe that consumers bear even more of the burden." This is one reason why most Mainland jurisdictions have made the policy decision to assess new development with only a portion of the attributable costs. Along this line, tax revenues should always be used in some fashion to fund at least a portion of new infrastructure. As David Rae points out, a community needs to consider the entire menu of creative financing options. Special assessment districts, the greater use of special purpose revenue bonds, and tax increment financing are examples of other ways to pay for growth, as opposed to sole reliance on impact fees. In Hawaii, for example, the State should provide the Counties with more tax revenue for the purpose of funding infrastructure. of Impact Fees in Hawaii Ben Kudo discusses proposed Maui and Hawaii County impact fee ordinances in his Chapter. Both proposals are well drafted and, with one exception, fol low traditional rational nexus theory on the use and limits of impact fees. The one possible exception to this is the fact that the comprehensive Hawaii County Unified Impact Fee proposal includes a housing linkage impact fee to be collected from non-residential development (resort, retail, commercial, office, industrial, medical office). This chapter has discussed the benefits and limitations of impact fees. These general considerations certainly apply to Hawaii. There exist, however, some unique circumstances in our State that can serve to both help and hinder impactfee implementation. The dominant role of the State government in the land 179 I I use a royals rocess and in certain infrastructure items, notabl schools and roads, has prompted some PP P Y to suggest that aState-wide impact fee system would be appropriate. The primary technical dffficulty with this approach is that the State does not issue building permits or subdivision approvals--the development entitlements that trigger payment of the fees. The State does negotiate exactions through the Land Use Commission, but this process captures only those projects requiring reclassification. Impact fees are intended to broaden, not narrow, the scope of developments that are required to pay fees. So notwithstanding Hawaii's unusual level of State Involvement in land use planning and regulation, impact fees should remain at the County level. As indicated by a number of the public officials interviewed in Chapter 11, the very difficult matter of coordinating County planning with State infrastructure needs to be addressed in each ordinance. The HawaiiCountyimpactfeeproposal,forexample,IimitsitselftoCountyroads. Whllethisistheeasycourse to take, many of the State's most serious traffic problems occur on State roads. The West Maui transportation impactfee on the other hand, Includes a State highway, Honapiilani Highway, in its planning model. Improvements to it using impactfees are contemplated. Unless these congested State highways are turned over to the Counties, along with a commensurate increase in tax revenue to maintain them, we recommend the Maui approach. In 1986, the State and Maui County executed a "Comprehensive Agreement" dealing with transportation. The Agreement, signed by then-Governor Ariyoshi and Maui Mayor Tavares, calls for the State and the County to produce an overall Work Program to develop a coordinated transportation plan for Maui. Statutory authority already exists for the State and the Counties to share funds for transportation improvements.78 Thus, many of the pieces are in place for the use of County-derived impact fees to be used for improvements to State roads. A major question that remains is whether the State will program its road Improvements in coordination with County capital improvement programs so that the impactfees will be used in a timely manner. The State also needs to remedy existing deficiencies. Passage of an infrastructure impact fee ordinance for Oahu (sewer, traffic, parks, etc.) may occur in 1989. It will require an analysis of infrastructure needs and funding sources. In addition, the ordinance must include a careful system of credits for previous exactions that have been imposed on projects. Integrating impact fees into a jurisdiction that has a mature system of ad hoc negotiated exactions, asweli as a mature infrastructure network, such as Oahu, means that care has to be exercised so that projectswith unilaterals either wil I get full credit for exactions required by the unilaterals, or will have the unilaterals replaced by the impact fees. Anything short of this would be inequitable. The Board of Water Supply already uses a de facto impact fee system, that includes credits for dedicated facilities. So it is certainly possible to implement a fair system. The transportation problems on Oahu, both generally, and particularly in the emerging growth areas of Central Oahu and Ewa, could be alleviated to some degree by an impact fee program. The large projects requiring State and County land designations have been exacted substantially for transportation improvements over the last several years. Many other projectswithsubstantiatcumulativetrafficimpacts have not contributed at all. An impact fee system could correct this imbalance with regard to future development. The major limitation of transportation impact fees for Oahu that would need to be recognized in an ordinance is the amountof thefees. Even though Federal funding for highways is decreasing, impactfees should never be thought of as a replacement for Federal funds. It is a financial impossibility. Moreover, it violates the basic Impact fee principle that development must pay no more than its fair share. Amore realistic possibility for Oahu transportation fees would be their use as the State or County matching share 180 to Federal funding. This also demonstrates how imperative it is that the State and Counties work together on the jurisdictional Issue. Mention should be made of the possibilities for West Hawaii. This acknowledged "Gold Coast" growth region of the Big Island may become the laboratory for creative financing in this State. For one thing, the entire menu could be used. AI Lyman recognized this in his interview. In particular, he mentioned combining Impact fees with tax increment financing to pay off County bonds, which would provide the up- front money for constructing the public facilities. The State of Hawaii has declared West Hawaii a priority area for Its planning and infrastructure programming efforts. This should greatly increase the likelihood of timely provision of infrastructure by the State government. The final and most difficult issue regarding the use of impact fees in Hawai I iswhether theywlll be accepted by the public sector as an alternative toad hoc negotiated exactions. The authors of this Report are not at all sure that this can or will occur. Impact fees are designed to eliminate Rhe mockery of ad hockery' as one commentator Ickes to put it.f° "Ad hockery" is absolutely thriving In fiawafl. Fortunately or unfortunately, the development community here generally is not inclined toward challenging the legality of existing exactions policy. This is notthat unusual. Developers In Boston, for instance, have been paying that City Its unusual linkage housing fees without challenge. Lftigation Is seen by many as a losing proposition even if you win, because of delays, appeals and antagonistic relations, among other reasons. So restraints on ad hoc exactions in Hawaii will have to be developed through education and consensus, rather than the courts. Governments in Hawaii, reflecting the populace, have very mixed feelings about development. Given Hawaii's unrivaled natural environment, this is easy to understand. Public officials presently are in favor of "affordable housing." You hear no such declarations, however, about market housing, even though more market housing is also very much needed in our State. Ad hoc exactions, in addition to representing a way to acquire the facilities needed for growth, can also fulffll the implicit purpose of an'excess-profits' tax. This squares directly with the strong notion practiced In Hawaii that development is a privilege, and that one should pay dearly for this privilege. We feel it is time, once and for all, to dispel this notion that use of one's land and developmentof one's land is an absolute privilege to be granted at the discretion of the government. We must dispel this notion M our goals of affordable housing and beneficial, competitive development and growth In our State are to become a reality. The authors of this Report see planned growth policies, not exactions or privilege policies, as the proper way to determine where, when, and how we grow, and as the proper way to ensure the continuance of Hawaii's unique quality of iffe. Impact fees are one tool that can help In this regard, and we look forward to working with the public sector to accomplish these community goals. ~ 181 Footnotes to Text 1. 107 S. Ct. 3141 (1987). 2. 107 S. Ct. 3141, at p. 3148. 3. 107 S. Ct. 3141, at p. 3150. 4. Cnnarruction in Hawaii 1988, Bank of Hawaii, p. 21. 5. L~atp.16. 6. Realtor News, The National Association of Realtors, August 15, 1988. 7 Ttio +987 State of Hawaii Data Book: A Statistical Abstract. State Department of Business & Economic Development, p. 581. 8. Ellickson,Robert;"ThelronyoflnclusionaryZoning,"ResolvingtheHousinq rl I~,Pacificlnstitute For Public Policy Research (San Francisco, CA 1982). 9. 456 A 2d 390, at p. 441. 10. 456 A 2d 390, at p. 443. 11. "Property Tax Reform in Hawaii". Speech to Annual Conference of the Hawaii State Association of Counties, June 24, 1988. 12. "Property Tax Reform in Hawaii" Economic Indicators, First Hawaiian Bank, July/August 1988. 13. Pai, F~onomic Indicators. 14, g ~cinay ss Trends, Bank of Hawaii, March/April 1987. 15. Urban Land Institute Development Trends 1988, Washington D.C. 1988, p. 15. 16. ~asp.15 17. Huffman, Nelson, Smith &Stegman, "Who Bears the Burden of Development Impact Fees?" Journal of the American Planning Association, Winter, 1988. 18. Hawaii Revised Statutes. Chapter 264. 19. Urban Land Institute, "Development Fee Workshop", unpublished lecture by Michael A. Stegman; Los Angeles, CA, April, 1988. 182 CHAPTER 6 Impact Fees and Housing Exactions Programs: Policy Statement of the Land Use Research Foundation of Hawaii Paying For Growth In Hawaii Because of the importance of issues relating to housing and infrastructure Improvements, the Land Use Research Foundation embarked upon the production of a comprehensive report, Payjng for Growth in Hawaii• An Analygis of Impact Fees and Housing Exactions Programs. The ever increasing spiral of ad hoc negotiated exactions Is of grave concern to the development community, and the ultimate effect of such exactions is detrimental to all. Since economic growth must continue for the benefit of our society, our report focuses upon the best ways to spread the costs of growth among the private development sector, the business sector, government and the general public, for reasons of fairness and efficiency. Based upon the findings of this report, the Foundation recommends the folk>vring approaches: • Impact fees are superior to current ad hoc development exactions in a number of ways: from the legal, economics and planning perspectives. Fees that are directly attributable to the development, and are Imposed as a substitute for, rather than a supplement to, ad hoc negotiated exactions, will present a fairer and more efficient alternative. • Impact fees should be a supplement to government revenues derived through taxationfor the same fairness and efficiency reasons. Impactfees should be considered in conjunction with other forms of alternative financing, such as tax increment financing and special assessment districts. The right mix will differ depending upon the geographical and political area, and the specific project circumstances. • Impact fees for transportation, sewerage and water facilities should be encouraged with the understanding that the State and the Counties must cooperate in the programming and funding of new capital facilities. This is especially critical in the area of transportation due to Hawaii's high incidence of State roadways. • State and County developmeqt projects also impact public facilities. These projects should not be exempt fdom the payment of impact fees. 183 An equaly signrficant issue addressed in our report is the use of housing exactions In order to produce affordable housing. Our conclusions are as folkrvvs: • Creating more housing opportunities through the open market remains the keyto housing availability and resulting affordability. Competition rather than compulsion will produce positive results. In fact, housing exactions are detrimental to the actual provision of affordable housing and to the housing industry as a whole. Such requirements push up rents and prices in the open market, where the majority of the need group must still competeforhigher-priced, but less available housing units. • Housing exactions are also questionable, legaly, since It can be argued that they are not reasonably related to the Impact caused by the development. • The preferred alternative to housing exactions in Hawaii Iles in the redesignation of more lands to urban use. Of the 4 million acres of land in the State, 3.8 million acres, or 9696, Is designated Agricultural or Conservation, and thus unavailable to meet housing needs. • Middle-class residents have suffered the most from Hawall's restrictive land use policies. They are locked out of "affordable' units because of earning too much, and locked out of'markeY units because of earning to little. With sufficient urbanized land made available for housing and the commercial activities It spawns, competition--ardentand tough--will bring about units available to all residents. If the provision of housing Is a major social program, all of us as residents should bear the burden, not Just a few. This is fundamental fairness. 184 BIOGRAPHIES OF CONTRIBUTORS AND EDITORS David W. Rae Mr. Rae holds an M.U.R.P. degree from the Department of Urban & Regional Planning at the University of Hawaii at Manoa, and an M.P.H. degree from the School of Public Health, also at UHM. He also holds an M.S. degree in Educational Psychology from the College of Saint Rose in Albany, New York, and a B.S. Degree in organizational psychologyfrom Union College in Schenectady, Newyork. Mr. Rae isthe Project Manager for land development, Kapolei Properties, for the Estate of James Campbell, as of August 1988. Prior to this, hewas a real estate development planner, producing financial feasibility and market studies, andemployeeandaffordablehousingplans. Forthreeandahalfyears,heservedasSeniorPolicyAdvisor to the Honolulu City Council's Housing Committee. For the four years prior, he was a principal of the regional development planning firm of Matteson & Rae Associates, Inc. From 1975 to 1977, he served as the Director of the Equinox Counseling Center for the New York State Department of Health. Benjamin A. Kudo A partner of the law firm of Kobayashi, Watanabe, Sugita, Kawashima & Goda, Mr. Kudo heads the land use section, handling major residential and commercial developments throughout the State. He holds a J.D. degree from Georgetown University Law Center in Washington, D.C., and an M.B.A. degree from the College of Business Administration at the University of Hawaii at Manoa. He also holds a B.S. degree in Mechanical Engineering from the University of Washington. Prior to the start of his legal career, Mr. Kudo was employed by Oceanic Properties, Inc., where he served in a number of capacities, including Senior FinancialAnalyst. HewasalsoemployedbyAmfacDevelopmentCorporationasAssistantVicePresident, responsible for asset and property management. Mr. Kudo has written an article entitled "Nukolii -Private Development Rights and the Public Interest," published in The Urban Lawver, Spring 1984. Louis A. Rose A Professor with the Department of Economics at the University of Hawaii at Manoa, Mr. Rose has specialized in the teaching of microeconomics and urban economics since 1969. He holds a Ph.D. in Economics from UCLA, an M.A. degree from the University of California, Berkeley, and a B.S. degree in Chemical Engineering from the University of Oklahoma. From 1982 to 1983, he was a Fellow with the Lincoln Institute of Land Policy in Cambridge, Massachusetts, and a Lecturer with the Departmentof Urban Studies and Planning at M.I.T. Professor Rose has served in a variety of other professional capacities, including: consultanttotheTaxRevisionCommissionfortheDistrictofColumbiaonhousingspeculation and public policy; program analyst for the U.S. Department of Housing & Urban Development on the economics of land use and the urban environment; and an instructor for the Hawaii State Department of Planning 8 Economic Development on the economics of environmental control. He has published papers and monographs on urban land supply, infrastructure financing, housing speculation, and other topics. Harold S. Masumoto Mr. Masumoto is the Director of the Office of State Planning, and was formerly Special Assistant to Governor John Waihee. He was educated at Hilo High School, and at the University of Hawaii at Manoa where he received B.A. and M.A. degrees in Political Science. He obtained a J.D. degree from the National Law Center of George Washington University, and a Certificate of Completion from the Institute for Educational Management at the Harvard Graduate School of Business. For more than 20 years, he served in a number of administrative capacities at the University of Hawaii at Manoa, including: Vice President for Administration; Director of Administration; Budget and Fiscal Officer and Chief Administrative Officer 185 for the Community College System; Administrative Director for the Division of Continuing Education and Community Services; and Institutional Analyst and Budget Director. Mr. Masumoto has also served with the State Legislature as: Research Analyst; Chief Clerk for the Senate Ways and Means Committee; assistant to the Senate President; and assistant in Research for the Legislative Reference Bureau. Joseph K. Conant Mr. Conant is the Executive Director of the State Housing Finance and Development Corporation, and the Acting Executive Director of the State Hawaii Housing Authority. He previously served at HHA as the Program Director of the Targets Projects, Director of Housing Management, and Land Reform Supervisor. From 1981 to 1984 under former Honolulu Mayor Eileen Anderson, Mr. Conant was the Director of Housing & Community Development. He previously served with the U.S. Army Corps of Engineers and prior to his retirement, was the General Staff Logistician responsible for the direction and operations of Installation services for the U.S. Army Hawaii Command. Donald A. Clegg Since 1985, Mr. Clegg has been the Chief Planning Officer for the City & County of Honolulu. For the four years prior, he was a licensed realtor with the commercial brokerage firm of Grubb and Ellis, where he specialized In the sale and leasing of commercial real estate and in the financial analysis of commercial properties. Between 1973 and 1980, Mr. Clegg served in various capacities with the City, including Deputy Director of the Department of Land Utilization and Deputy Director of the Department of Data Systems. Prior to this, he headed his own company and conducted work for the City concerning the General Plan, housing costs, and an evaluation of the park dedication ordinance. For TEMPO, the General Electric Centerfor Advanced Studies, Mr. Clegg managed the EconomicAnalysis Group in Santa Barbara, and later managed Its Hawaii operations between 1957 and 7970. He holds B.A. and M.A. degrees from the University of Southern California in Experimental and Theoretical Psychology, and has completed majority coursework for a B.S. in Engineering at USC. John P. Whalen Since 1985, Mr. Whalen has served as the Director of Land Utilization for the City & County of Honolulu. He was formerly a planner for the City Departments of General Planning, Land Utilization, and Housing and Community Development. Before his work with the City,'Mr. Whalen was senior associate with the landscape, architecture and planningfirm of EDAW, and an independent planning consultant on housing, environmental and community projects. He spent nearly 6 years in Latin Americaworking on agricultural land use. Four years were in Guatemala where he established a demonstration land reform project, encompassing various aspects of community development in highland Indian villages. In the Guayas Basin of Ecuador, as a United States intern, he worked on the planning of a large-scale flood control irrigation and agricultural homesteading project. Mr. Whalen has a B.S. degree in Political Science and pre- Architecture from Rutgers University, where he graduated Phi Beta Kappa. He holds an M.A. degree in Urban Planning and Public Law and Government from Columbia and City University of New York. Michael Moon Mr. Moon has been the Director of Housing & Community Development for the City r£ County of Honolulu since August 1986, after serving as its Deputy Director. He is a licensed general contractor and a registered civil and structural engineer in the State of Hawaii, and a registered civil engineer in the State of California. Mr. Moon has 23 years of engineering, management, commercial and corporate experience 186 I in government and private industry in Hawaii, on the Mainland and abroad. His varied projects have included residential subdivisions, condominiums, apartments and commercial developments. He was educated at lolani School and the University of Hawali at Manoa. Christopher L. Hart Mr. Hart's 16 years of service in Maui County's Planning Department led to his current position as Director of Planning. Mr. Hart's prior professional experience includes the arechitectural firm of Perkins & Will Partnership of W hite P lains, New York, and the Hudson River Valley Commission for the State of New York. In Hawaii, he was employed by EDAW, Inc. and Oceanic Properties, Inc. A graduate of Syracuse University's College of Environmental Science and Forestry, School of Landscape Architecture, Mr. Hart holds a B.A. degree in Landscape Architecture. Albert Lono Lyman Mr. Lyman is the Director of the Planning Department for the County of Hawaii. He was educated at: Punahou High School; Syracuse University, New York, where he received a B.A. degree in Economics; and the University of Hawaii at Manoa, where he received an M.B.A. in Business Economics, Finance and Marketing. He formerly headed his own marketing, economics and financial consulting firm. From 1973 to 1981, he was the manager of the Management Consulting Department of the Honolulu office of Peat, Marwick, Mitchell & Co. For two years, he was affiliated with Crocker Bank, San Francisco, as a financial analyst. Tom Shigemoto Mr. Shigemoto is the Director of the Kauai County P tanning Department, a position he has held since 1987. He was Deputy Planning Director from 1983 to 1987, after joining the Planning Department as a staff planner in 1971. Mr. Shigemoto was educated at the University of Hawaii at Manoa, where he received a B.A. degree in Urban & Regional Design. Orlando R. 'Dan' Davidson Prior to being named the Executive Director of the Land Use Research Foundation (LURE) of Hawaii in 1987, Mr. Davidson was Vice President, Land Use at Kaiser Development Company, where he began as Legal Counsel in 1983. Previously, he served for a year and a half as LURF's General Counsel and later, Executive Director. From 1977 through 1981, Mr. Davidson was a practicing attorney, first as an associate with the law firm of Ikazaki, Devens, Lo, Youth & Nakano, and later as a Deputy Corporation Counsel for the City & County of Honolulu. He holds a J.D. degree from the UCLA School of Law, and a B.A. degree in American History from Claremont Men's (now McKenna) College. Ann Usagawa Ms. Usagawa is Senior Researcher for the Land Use Research Foundation, where she has been employed since 1981. She was previously employed by Belt, Collins & Associates as a technical writer and editor. Prior to this, she was a Lecturer at the University of Hawali at Manoa, where she taught expository and business writing and introductory literature classes. She holds B.A. and M.A. degrees in English from UHM. She graduated valedictorian from St. Joseph High School in Hib. 187 PAYING FOR HAWAII'S INFRASTRUCTURE A SYMPOSIUM ON INNOVATIVE INFRASTRUCTURE FINANCING OCTOBER 7, 1988 HYATT REGENCY WAIKOLOA WAIKOLOA, HAWAII PAYING FOR HAWAI: A SYMPOSIUM INFRASTRUC7 Hosted By: THE C THE HAWAII ISLAND ECa THE OFFICE OF STATE 8:30 - 9:00 REGISTRATION 9:00 - 9:15 WELCOME AND OPENING REMARKS Clinton Taylor, Executive Director, Hawaii Island Economic Development Board The Honorable Dante Carpenter, Mayor of the County of Hawaii 9:15 - 10:30 PANEL 1: "INNOVATIVE INFRASTRUCTURE FINANCING-TOOLS AND TECHNIQUES" Adrien P. Melly, Senior Vice President, Sutro do Co., San Francisco "Alternative Financing Techniques" Roger L. Davis, Attorney, Orrick, Herrington, do Sutcliffe, San Francisco " D _ / Debra J. Andrew ssistant City Manager, City of Corpus Christi, Texas ,7o.1.G or Local Development" 10:30 - 10:45 BREAK 10:45 - 12:00 PANEL 2: "MORE INNOVATIVE INFRASTRUCTURE FINANCING-TOOLS AND TECHNIQUES" Larry J. Scully, President, Scully Capital Services, Inc., Washington, D.C. "Privatization" Thomas B. Holley, Partner, Kutak, Rock do Campbell, Denver, Colorado "Public/Private Partnerships" Raymond K. O'Neil, Executive Vice President, Capital Guaranty Insurance Company, San Francisco "Credit Worthy Techniques" 12:00 - 1:45 LUNCHEON "IMPACT FEE SYSTEMS-THE STATE OF THE ART" Dr. James C. Nicholas, Professor of Urban do Regional Planning, College of Law, University of Florida and consultant to more than fifty municipalities across the United States on impact fees. I1'`T~RASTRUCTURE 1 INNOVATIVE E FINANCING ~NTY OF HAWAII )MIC DEVELOPMENT BOARD ~ANNING, STATE OF HAWAII 1:45 - 2:45 PANEL 3: "CASE STUDIES OF INNOVATIVE INFRASTRUCTURE FINANCING^ Charles A. Gomulka, Executive Vice President, Russell, Rea, do ZappaLi, Inc., Pittsburgh, Pennsylvania '"Phe Allegheny Experience" Valentin V. Alexeeff, City Manager, City of Clayton, California "The Clayton Experience" 2:45 - 3:00 BREAK 3:00 - 4:30 PANEL 4: "HAWAII'S APPROACHES TO INFRASTRUCTURE FINANCING- PAST, PRESENT, AND FUTURE" Tobias Martyrs, Assistant Vice President, Hawaiian Trust Company, Ltd. "The Investor's Perspective" Renton L. K. Nip, Partner, Foley, Maehara, Judge, do Nip, and Chairman, Hawaii State Land Use Commission "Hawaii's Infrastructure Financing Laws" Albert Lono Lyman, Planning Director, County of Hawaii "The County Perspective" Harold Masumoto, Director, Office of State Planning, State of Hawaii '"Phe State Perspective" 4:30 - 4:45 CLOSING REMARKS - "WHERE DO WE GO FROM HERE?" Clinton Taylor and Albert Lono Lyman 4:45 - 6:00 RECEPTION - NO-HOST COCKTAILS PROPERTYT.9X REVENUES FROM PREMIUM RESORT-RESIDENTIAL HOMES AND CONDOMINIUMS L'~' WESTHAWAI ~I PPEPARED FOR: Hawaii Leeward Planning Conference PREPAFED B~- Decision Analysts Hawaii, Inc. May 2003 CONTENTS 1. INTRODUCTION 1 a. Content and Purposes ] b. Resort-Residential Projects 1 c. Tepesof a nits 1 d. Methodology 1 e. Organization 2. NUMBER OF RESORT-RESIDENTIAL UNITS, BY TYPE 2 a. Existing Lnits,'_00; b. Planned L~nits,2003to 2008 3. AVERAGE PER-UNIT TAX ASSESSMENTS AND PROPERTY TAXES 3 a. Homes and Home Lots b. Condominiums and Unbuilt Condominium Units ~ c. Tepical Homeowner 4. TOTAL PROPERTY TAX REVENUES 4 5. ECONOMIC BENEFITS OF RESORT-RESIDENTIAL DEVELOPMENT 5 a. Property Tax Revenues eersus Support Costs b. Contribution to Economic Development 6 c. Additional State and Counh• Revenues 8 6. RISK OF LOSING RESORT-RESIDENTIAL TAX REVENUES AND PLANNED DEVELOPMENT 9 a. Risk of Losing Tax Revenues Because of Lower Income Tax Rates........ 9 b. Risk of Losing Planned Resort-Residential Development Due to High Property Tax Rates........... _ 10 7. SUMMARY lO S. REFERS'JCES 1~ ii FIGURES 1. Number of Premium Resort-Residential Units in West Hawaii, by Tvpe of unit: Existing (2003) and Planned (2003 to 2008) Units 2. Average Annual Property Tax Revenues, by Tvpe of Premium Resort- Residential Unit in West Ha~n~ai'i: Existing (2003) and Planned (2003 to 2008) Units 3. Total Annual Property Tax Revenues trom Premium Resort-Residential Homes and Condominiums in West Hawaii: Existing (2003) and Planned (2008) Units TABLES 1. Rea] Property Tax Rates, by Counh•: 2003 2. Existing (2003) Premium Resort-Residential Housing Units in West Hawaii: Properri' Tax Assessments and Revenues 3. Planned (2003 to 2008) Premium Resort-Residential Housing Units in West Hawaii: Properri• Taa Assessments and Revenues Economic Impacts of Premium Resort-Residential Development in West Hawaii: Existing (2003) and Planned (2003 to 2008) iii PROPERTY TAX REVENUES FROM PREMIUM RESORT-RESIDENTIAL HOMES AND CONDOMINIUMS IN WEST HAWAhI L INTRODUCTION a. Content and Purpose This report summarizes current (2003) and planned (2003 to 2008) property tax revenues derived from premium resort-residential homes and condomini- ums in West Hawaii. Estimates are also provided for the cost of Counri° sup- port services, and for the ecunomic impacts of resort-residential development. The purpose of the report is to illustrate the taa and economic benefits that accrue to the County of Hawaii from these projects. b. Resort-Residential Projects The resort-residential projects include single-famih~ homes and condomini- ums associated with the fullovcing developments in West Hawaii: the Mauna Kea Resort, Mauna Lani Resort, Waikaloa Beach Resort, Puako Beach Lots, Kau- palehu, Hualalai Resort, Kukio, and Hokulia. c. Types of Units The projects include sia types of resort-residential units single-famih• homes occupied by homeov` Hers (owner-occupied homed, vacation homes and second homes, Tuts for single-family homes, owner-occupied condominiums, vacation condominiums and second condominiums, and condominium units that have been platted but are not yet constructed. d. Methodology Progerri~-Tax Revenues Estimates of 2003 property taa revenues are based on preliminary assess- ments from the Counri_• of Hawaii. Since the assessments are preliminary, the results of the analysis are subject to small changes that could occur from chal- lenges to assessed values and / or correction of possible errors. Projected tax revenues are based on (1) the number of units planned by developers over the next ~ years; (2) assessed property values of comparable projects, with no adjustment made for int]ation; (3) the 2003 average for the per- centage of built o~n'ner-occupied units, (-Il the 2003 average exemption for 1 PROPERTY TAX REyENLES FROM PREMILM RESORT-RESIDE'~~TIAL HOMES AND CONDOMINIC:vI51N WEST HAwAI~I ~ homeowners; applicable property tax rates; and (b) adjustments for properri' taxes paid on unimproved land. Properh~ throughout Hawaii is assessed at the estimated market value. The net taxable value of the properri' is the assessed value less exemptions. For properri• owners who occupy their unit (owner-occupants), the "homeowner exemption" is X0,000 for individuals up to age 60, $50,000 for ages 60 to 69, and $100,000 for ages '0 and older. Other exemptions are available for individuals who are blind, for Hansen's disease patients, and for totally disabled veterans. Homeowner exemptions are available to owneroccupants onh~. Table 1 shows properri• taa rates per $1,000 in net taxable value for all coun- ties and for carious classes of property. The "hotel and resort" class is included in the table since it includes some resort-residential projects. Cost of Count~ercices Estimates of the cost of Counri• services are based on (1) the estimated num- ber of occupants of resort-residential units and (2) the average cost of provided Cow~te sen°ices to all residents and visitors. The estimate is high since owners of resort-residential units do not require many of the County services provided to ri-pical residents (see Section ~.a). Economic Impacts Estimates of economic impacts are based on (1) the estimated annual expen- ditures for construction, the estimated amtual expenditures by occupants of built units, (3) economic multipliers Erom the State's input-output model, and discounting of indirect impacts by 25"~, to account for the fact that some goods and services come from Oahu. e. Organization The results of the analysis are summarized in three figures, four tables, and accompanying text. Figure 1 summarizes the amount of existing (2003) and planned (2003 to 2008) premium resort-residential development in West Hawaii. Figure 2 summarizes the average annual properri• tax revenues for each tepe of existing and planned unit. Figure 3 summarizes the total amount of properri• tax revenues derived from the resort-residential projects in 2003, uid the projected rep°enues for'_008. Property tax rates are summarized in Table 1. Supporting data for the fig- ures are provided in Tables_ and 3. Table 2 gig°es information on the existing (2003) amount of premium resort-residential properri• in West Hawaii, and the assessed properri- values and properri• taxes. Table 3 provides similar informa- tion for projects planned over the next S years. Table ~ summarizes the eco- nomic impacts of resort-residential development. PROPERTI TAY REV EN I: FS PROM PRE~1ICM RESORT-RESIDENTIAL HOMES AND CONDOMINICMS IX WEST HAN'Al~l 3 2. NUMBER OF RESORT-RESIDENTIAL UNITS, BY TYPE The number of existing and planned premium resort-residential units in West Hawaii is summarized in Figure ] by tv_ pe of unit; further detail is pro- vided in Tables 2 and a. Existing Units, 2003 In 2003, the listed West Hawaii projects contained about 2,280 existing or platted resort-residential homes, condominiums, and lots, of which: - about -11"< were homes or lots for homes, and ~9' ~ were condomini- ums or platted but unbuilt condominium units; and - about 3°~. were owner-occupied units, ~1`~ were vacation homes or second homes (including both single-family and condominiums), and -17`'x. were vacant lots or unbuilt condominium wits. Of the built units, about 10`~~ of the homes and -1`~, of the condominiums are owner-occupied. b. Planned Units, 2003 to 2008 From 2003 to 21108, an additional 1,~~0 resort-residential units are planned-an increase that will bring the total count to about 3,830 units, or 68' more than in 2003. Built units will increase by an estimated 1,-100 units, which will bring the total count to about 2,6] 5 units or 118 ~ more than in 2003. Of the planned units, about ~F' < will be homes and will be condomini- ums. Also, about 6', will be owner-occupied, 84'~, will be for vacation or second-home use, and 10' ~ will be vacant lots or w~built condominium units. 3. AVERAGE PER-UNIT TAX ASSESSMENTS AND PROPERTY TAXES For each type of resort-residential unit, the current and projected average property-tax revenues are summarized in Figure 2; further detail is provided in Tables and 3. a. Homes and Home Lots In 21103, resort-residential owner-occupied homes hate an average assessed value of about g2.~ million; the average homeowner exemption is about $61,600; and the average property tax is about $13,300 per year. Second homes and vacation homes have an average assessed Value of about $2.9 million, and the a~°erage properh° tax is about 827,800 per year. Improved lots have an average value of about $1? million on which owners pay an average of about 812,100 per year in property taxes. PROPERTI TA\ REV'Eti LES FROM PREMICM RESORT-RESIDE!CTIAL HOMES A:1D ~ONDOMItiICMS IS WESI HA1M1'Al~l Based on project plans, new units will have higher average values and own- ers will pay higher property taxes. b. Condominiums and Unbuilt Condominium Units In 2003, resort-residential owner-occupied condominiums have an average assessed value of about $790,100; the average homeowner exemption is about X77,200; and the average property tax is about $-1,000 per year. Second condo- miiuums and vacation condrnninimns have an average assessed value of about $806,1OQ and the average property tax is about $i,900 per year. Platted but unbuilt condominium units have an average value of about $61,400 on which owners pay an average of about 8600 per year in property taxes. Based on project plans, new units will have higher average Values and own- ers will pay higher ptt~perri• taxes. c. Typical Homeowner As indicated at the bottom of Figure 2, a typical owner-occupant of a single- family home on the Big Island pays less than $900 per year in properri• taxes. This is based on an assessed value of about $200,000, a homeowner exemption of $40,000, and the "homeowner" tax rate of $5.~5 per $1,000 in net taxable value. 4. TOTAL PROPERTY TAX REVENUES Total property-tax revenues for the premium resort-residential housing units in West Hawaii are summarized in Figure 2 for 2003 and 2008; further detail is provided in Tables and 3. In 2003, total properri• tax revenues derived from premium resort-residen- tial units in West Ha~yai'i amount to about $22.3 million per year, or about 21` of all properri• tax revenues on the Big Island. In comparison, the premium- yualitc hotels and associated commercial areas and golf courses in West Hawaii pay about $8 million per Vear in properri° taxes. Thus, the premium resorts in West Hawaii and associated developments pay more than $30 million per year in property taxes ($22. ~ million + $8 million). By 2008, property tax revenues from resort-residential developments are projected to grow to about $~~5 million per year. Excluding current properri' taxes from existing projects and from unimproved land for planned projects, the -year increase in annual pmperri~ tax revenues from new resort-residential development is estimated at about $26.7 million. PROPERTI"T.4x REV'EtiCEti FROM PREx11L 11 RESORT-RHSIDENTIAL HOMES AND CONDOMINICMSIN WEST HAV~AI~I 5. ECONOMIC BENEFITS OF RESORT-RESIDENTIAL DEVELOPMENT As discussed below, resort-residential development provides substantial economic benefits to the County, including but not limited to high property tax revenues. a. Property Tax Revenues versus Support Costs As shown in Figure 3, existing and projected total property tax revenues from resort-residential properties are substantial: $22.3 million per vear in 2003, plus an additional $26J million per vear by 200H. The total revenues are sub- stantial because of -the large number of existing and projected resort-residential units (see Figure 1); - very high properly values for most wits (see Tables 2 and 3); - the low percentage of homeowners who yualifa for homeowner exemptions (about ll)' ~ of the built homes and about of the built condominiums, with an exemption of $~Q000 to $100,000, depending upon age); - the high pmperty tax rate for properties that are not occupied by homeowners ($9.10 ur $9.85 per $1,000 of taxable value versus $5.55 for homeowners); and - the resulting high average property tax for each l_•pe of unit (see Fig- ure 2). A further advantage of resurt-residential development is that they provide a steads and predictable stream of property tax revenues to the Counh~. This contrasts with revenues from State excise taxes, income taxes, transient accom- modatirnls taxes, and mane other taxes which decline during recessions. The offsetting costs to the County to support resort-residential development are small in comparison to the costs for typical residential developments on the Big Island. These lower Counl~ costs are due to the following: - Resort-residential developers fund most or all of the building costs Eor (1) infrastructure improvements (roads, water systems, wastewa- ter systems, etc.), and (2) many recreational facilities (golf courses, tennis courts, spas, fitness centers, swimming pools, picnic areas, etc.). - Resort-residential communih association dues cover the cost of (1) maintaining local roads; (2) operating and maintaining waste-water systems; (3) operating and maintaining recreational facilities; and (-t) providing on-site ~ecurih~. Pizoi~Eierti~ Tax REVEV~ES Eizona pRE'vIIC91 RESORT-Resi~Ex~Ti:xE HOMES .AtiD C ONDOMISICMS IA WEST HA1h'Al~l 6 - The comparativeh• low occupancy rates result in a lower demand for Counri~ services, especially for second homes that are used only occa- sionalh~ . - Most residents are comparatively wealthy, so require little govern- ment assistance. - Most occupants are retirees and visitors who are less likely to travel offsite during heap v rush-hour traffic periods, and so are less likely to add to the demand for additional road capacity. - No government services are required for the many empty lots and unbuilt condominium units. A high estimate of County expenditures to support resort-residential units is $1.-f million per year for existnzg projects (about 6°~, of property-tax revenues), and about 81.7 million per year for planned projects (about h"i of revenues). These cost-estimates are based on (1) 3~`;, and 60' ~ average occupancy for bui]t homes and condominiums, respectively; (2) and 2 people per occupied unit for homes and condomnliums, respectiveh•; and (3) and County support expen- ditures of $1,133 per person, which is a high estimate based on the Counts aver- age for all residents and visitors. Thus, properri•-tax revenues from resort-residential projects exceed support expenditures by $20.8 million per year for existing projects ($222 million - $1.~ million) and $25 million per year for pianned projects ($26.' million - $1.7 mil- lion). In effect, resort-residential projects provide substantial tax revenues to subsidize support services to other Big Island residents and visitors. b. Contribution to Economic Activity As explained belo~n~ and vummarized in "fable -1, construction and operation of resort-residential units contribute greath• to expanded economic activiri• on the sig f,ia„a. Construction Activity Between 2003 and 2008, the construction of resort-residential homes and condominiums is projected to average about 280 units per year (derived from Figure 1 and Table 3). Assuming construction costs that average about $1 2 mil- lion for homes and $700,000 for condominiums, and based on economic multi- pliers from The Hawaii Input-Output Study, the resulting economic activiri~ on the Big Island between 2003 and 2008 is projected to average about: $25~ million per near in construction actiairi•, - 818 million per year in indirect sales of goods and services in sup- PROPERTY TAh REVENI'ES FROM PP.E~fII;:VI RESORT-RESIDENTIAL HOMES AND CON DOMINIL~MS I'S WEST HA\NAI~I port of construction activity and construction workers, - 2,300 construction jobs, - 2,000 in indirect jobs in support of construction activity and construc- tion workers, and - $191 million per year in pavroll. A further advantage of resort-residential development is that the construr tion or a great many individual units and projects supports construction activiri~ that is steadier over time than are projects im~oh°ing a small number of large hotels. Furthermore, resort-residential homes are generally built by smaller Big Island contractors while major hotels are often built by larger oft-island contrac- tors. eratioitis Once constructed, resort-residential units are generally occupied by retirees and visitors who purchase guods and services that contribute to Big Island sales, employment and wages. Expenditures cover: home maintenance, home improvement and repair; yard maintenance; utilities; home furniture and equip- ment; housekeeping supplies; food and beverages; restaurants; clothing; per- sonal services; vehicle purchases fuel; vehicle services; medical services; legal services; accounting services; insurance; entertainment; charity contributions; etc In turn, the stores and workers who provide these goods and services pur- chase goods and sen•ices that contribute to additional Big Island sales, employment and wages. Thus, the resulting jobs are scattered throughout the Big Island economy, and range from entry-level to highly paid positions. As shown in Table -I, estimates of economic activity generated on the Big Island be occupied resort-residential units are: - $10: million per year in expenditures be occupants in 2003, increasing by an additional $L~ million per year be 2008; - $59 million per year in indirect sales of goods and services, increasing by an additional $6- million per year be 2008; - 1,700 jobs, increasing by an additional 2,000 jobs be 2008 ;and - ~~}9 million per year in pavroll in ?000, increasing by an additional $56 million per year by 2008. These estimates are based on (1) 35°~~ and 60' ~ average occupancy for built homes and condominiums, respecti~°elv; (2) 3.~ and 2 people per occupied unit for homes and condominums, respectively; (3) expenditures of $200 per person per day; and (-I) economic multipliers from The Hawaii Input-0utput Study. PROPERTY TA\ REyENI:ES FROA1 PREMICM RESORT-RESIDESTIAL HOMES AND ~ONDOMINIL MS IN WEtiT HAl1'.41~1 $ The economic contribution provided by the expenditures of resort-residen- tial occupants is similar to that provided by the expenditures of visitors who stay in hotels. However, their economic contribution is likely to be more stable than that from hotel visitors, since owners of resort-residential units are likely to occupy their units even during economic downturns. Potential for New Economic Op~ortwlities Mam• of the owners of resort-residential units are entrepreneurs, investors, members of the high-technology business community, etc Accordingly, they have access to other leaders in their field, others in the business community, and to im~estment capital Their entrepreneurial spirit, knowledge, and busi- ness connections offer a potential Eor significant economic development on the Big Island in fields that can help diversify the economy. c. Additional State and County Revenues In addition to the property taxes paid by owners of premium resort-residen- tial units, additional taxes and other revenues are generated by a varieh~ of taxes and tees applicable to the expansion of economic activiri• generated by the construction of resort-residential units and by the expenditures of the occupants of these units. These taxes and fees include the following: - State • General Excise Tax on gross sales income • Use Taz on the value of imported goods • Personal Income Tax on net income of individuals • Corporate h~come Tax on net income of corporations • Visitor Accommodations Tax on gross income from short-term rents • Public Service Companies Tax on gross income of utility companies • Banks and Other Financial Corporations Tax nn net income of financial companies • Insurance Premiums 1'ax on gross premiums • Fuel Tax on gallons sold • Environmental Response Tax on quantity of petroleum product sold to retail dealer or end user • Motor Vehicle 1ti'eight Tax nn the weight of a vehicle • Rental 'vlotor Vehicle and Tour Vehicle Surcharge Tax based on passenger days of rental for cars and monthly tax for buses PROPERTY TAx REVEN lL LS FROM PREMICM RESORT-RESIDENTIAL HOMES AND CONDOMINICMS IN WeST HAW'AI~I 9 • Liquor Tax on quantity sold • Tobacco Tax on quantity sold • Estate and Transfer Tax on shares of net estates • Conveyance Tax on the value of properri• transferred • Charges for various licenses, permits, and services - County • The Counri~ share of the State Visitor Accommudations Tax • The County share of Public Service Companies Tax • Public Utilih~ Franchise Tax on gross operating income of certain utilities (electric and gas companies) • Fuel Tax on quantity sold • Motor Vehicle Weight Tax on the weight of the vehicle • Charges for Y°arious licenses, permits, and services 6. RISK OF LOSING RESORT-RESIDENTIAL TAX REVENUES AND PLANNED DEVELOPMENT a. Risk of Losing Tax Revenues Because of Lower Income Tax Rates As noted in Section ~.a, relatively fevv- owners of resort-residential units (about 10` of the built homes and about -I"~ of the built condominiums) qualify for homeowner exemptions. As a result, most o~yners do not benefit from the 50,000 to $100,000 homeo~a•ner exemption. Also, these owners are subject to higher property tax rates: $y.10 or 59.85 per $1,000 of taxable value versus for homeowners ('Table 1). Many of these property owners may deliberately choose to declare a home in another state as their primary residence because the individual income tax rates are lower. EY'en though they may pae higher property taxes in Hawaii because of the declaration, they pay Lower state income taxes in their home State. In these cases, the Cuunty benefits from Hawai'i's comparatively high State incume tax rates. However, if the State were to lower the income tax rates, this could result in more property owners declaring their home in Hawaii a, their priman• resi- dence. In turn, this could cause a reduction in property tax revenues for the County from resort-residential homes and condominiums. PROPERTI TAS REV'ENL~ES FROx1 PREMII:M RESORT-RESIDENTIAL HO11E5 AND ~ONDO111NI1.'MS IN W 6tiT HA~1'AI'I lO b. Risk of Losing Planned Resort-Residential Development Due to High Property Tax Rates As shown in Table 1, non-homeowner tax rates are significantly higher for Hawaii County compared to the other counties. This largely reflects the fact that residential homes and condominiums on the Big Island have lower ~°alues than do similar properties on the other islands. Thus, higher tax rates are required on the Big Island in order to generate the same tax revenues from simi- lar homes and condominiums an other islands. However, the higher Big Island tax rates could cause some potential buyers of high-value resort-residential properties to favor other islands that have lower properri' tax rates. For example, the property tax on a $3 million resort-residen- tial home is more than $12,000 per year higher on the Big Island than it is on Kauai or 1Vlaui; over ]0 Bears, the difference in properri° tax amounts to Dyer $L0,000 (about -1' ~ of the $3 million home value). While many buyers of $3 million homes may consider this additional tax to be affordable, some may avoid the additional cost be choosing to buy on another island. 7. SUMMARY Premium resort-residential homes and condominiums in West Hawaii pro- vide substantial economic benefits to the the Big lsland. In particular, high property taxes tar exceed support services. Also, construction actin°iri~ and expenditures by occupants of the units contribute to economic growth and employment. 8. REFERENCES DBEDT. The Stag of Hacoai "i Data Bnnk. Annual. Department of Business, Economic Development and Tourism (DBEDT), State of Hawaii. The Hatnai "i bipi~t-O»tput Study: 19g; Benchmark Report. March 2002. Department of Finance, Counh• of Hawaii. "Summary of Revenues and Appropriations be Funds." Annual. Department of Finance, Counts of Hawaii. Property-tax data. Tax Fow~dation of Hawaii. "Taxes in Hawai'i." Am~ual. The Hallstrom Group. "Summarc Economic Impact Analysis and Public Costs/Benefits Assessment .associated with Development of 2,000 Luxury PROPERTI" ~TA\ REVENL ES FROM PREMII:M RESORT-RESIDE!JTIAL HOMES .a!vo roN~orai~i~~ns m' WEST Ha~~~i't 11 Homes in Haw'ai'i." Findings, Noe. 14, ?001. West Hawaii resort-residential de.°elopers. Proprietary development plans. Figure 1. Number of Premium Resort-Residential Housing Units in West Hawaii, by Type of Unit: Existing (2003) and Planned (2003 to 2008) Units Owner-occupied single- 19 family homes 61 163 Vacation and second homes 527 756 Lots for single-family homes 102 Ownervccupied ~ condominiums 32 Vacation and second 992 condominium homes " 776 306 Unbuilt condominium units 50 - 100 200 300 400 500 600 700 600 900 1,000 1,100 ? Existing Units, 2003 ? Planned Units. 2003 to 2008 Figure 2. Average Annual Property Tax Revenues, by Type of Premium Resort-Residential Housing Unit in West Hawaii: Existing (2003) and Planned (2003 to 2008) Units Ownerocwpied single-family $13,347 homes $16,640 $27,803 Vacation and second homes !r ' ~ :'..!,+i'~f~ r' ~ p?t ;.f•;..., $26,617 $1z,o7z Lots for single-family homes / r $16,694 ,r: Owneroccupied $3.957 condominiums ~ 665 Vacation and second S7'~ condominium homes , ; ~ Se ~ $605 Unbuilt condominium units $690 Typical residential home ~ $886 occupied by homeowner $5,000 $10,000 515,000 520.000 $25,000 $30.000 535,000 ? Existing Units, 2003 ®Planned Units, 2003 to 2008 Figure 3. Total Annual Property Tax Revenues from Premium Resort-Residential Housing Units in West Hawaii: Existing (2003) and Planned (2008) Units $ million per year $60 555.5 Current, " Unimproved 56,6 Land $50 Comment: County support services for premium I resort-residential units amount to about 6% of property tax revenues from these properties. $40 New 9263" $30 $20 Curtenl, Resort- $10 $22.2 Residential $22.2 (21% of tMal property tax revenues for N+e County) 2003 2008 Table 1. Real Property Tax Rates, by County: 2003 (Tax rate per 51,000 of net taxable value) Hawaii Honolulu Maui Kauai Class Land Buildin Homeowner (Owner-occupied unit) $ 5.55 As below 5 3.63 As below As below Non-Homeowner Improved Residential S 9.10 $ 3.65 S 4.93 $ 4.50 $ 5.49 or Single-Family Residential Unimproved Residential S 9.85 5 4.66 S 4.93 n.a. n.a. Apartment S 9.85 5 3.93 $ 4.93 S 8.15 S 8.55 Hotel and Resort S 9.85 5 9.96 $ 8.30 $ 8.15 $ 8.55 n.a. Not applicable. Table 2. Existing (2003) Premium Resort-Residential Housing Units in West Hawaii: Property Tax Assessments and Revenues Owner- Vacation and Lots for Homes Occupied Second and Unbuilt Item Homes and Homes and Condominium TOTAL Condominiums Condominiums Units Number of Units Homes 19 163 758 940 41% Condominiums 43 992 306 1.341 59% Total Units 62 1.155 1.064 2.261 3% 51% 47% Average per Home or Flome Lot Assessed Value $ 2.466.447 $ 2.876.478 $ 1.233,517 Less Exemption $ 161,5791 $ - i $ - Net Taxable Value $ 2.404.868 $ 2.876.478 ~ $ 1.233.517 Property Tax $ 13.347 $ 27.803 ' $ 12.072 Average per Condominium or Unit i i Assessed Value $ 790,123 $ 806.110 ~ $ 61 371 Less Exemption $ 1772091 $ - ~ $ - Net Taxable Value $ 7' 2.914 $ 806.110 $ 61.371 Property Tax $ 3.957 $ 7.940 $ 605 Total Assessed Value $ 80,837,800 $ 1,268.527.200 $ 953,785,100 $ 2,303,150,100 Less Exemptions $ 14,490A00) $ - $ - $ (4.490.000) Net Taxable Value $ 76,347,800 $ 1268.527.200 $ 953.785,100 $ 2,298,660,100 Property Tax Revenues $ 423.730 $ 12.408.516 $ 9,335.529 $ 22,167,775 Share of Total Property 2t°~° Tax Revenues for Coun Table 3. Planned (2003 to 2008) Premium Resort-Residential Housing Units in West Hawaii: Property Tax Assessments and Revenues Owner- Vacation and Occupied Sewnd Lots for Item Homes and Homes and Homes and TOTAL Condominiums Condominiums Condominiums Number of Units Single-family Homes, Existing Lots 36 292 1328) - 0% Single-family Homes, New Lots 25 235 430 690 45% Condominiums. Existing Prgects 12 294 1306) - 0 Condominiums, New Proects 20 484 356 860 55% Total Units 93 1.305 152 1,550 6% 84°/0 10% Average per Single-Family Home Assessed Value $ 3,032,854 $ 2.930.215 $ 1.897.907 Less Exemption $ (70.656) $ - $ - Net Taxable Value $ 2.962.198 $ 2.930.215 $ 1.897,907 Property Tax $ 16.440 $ 28.617 $ 18.694 Average per Condominium Assessetl Value $ 912.188 , $ 923.612 5 70.000 Less Exemption $ 171719)1$ - 5 - Net Taxable Value $ 840 469 $ 923.612 $ 70.000 Property Tax $ 4,665 $ 9.098 $ 690 Total Assessed Value' $ 214.194.065 $ 2,262.793.251 $ 1.007.206.373 $ 3 464.193.689 Less Exemptions $ 16.605.000),$ - $ - $ 16,605,0001 Net Taxable Value' $ 207.569.065 $ 2,262.793.251 $ 1.007.206.373 $ 3 477.588.689 Property Tax Revenues' $ r.152.119 , $ 22,158.873 $ 9.920.963 S 33,231,975 Less Existing Property Tax Revenues $ 1661,368)1 $ (5.696.893) $ (203.678) 5 (6.561.9391 Net Increase m Prope Tax Revenues' $ 490.751 $ 16,461,980 $ 9.717.304 S 26,670,035 ' Includes anbclpated adjustment to 2003 Oroperty values antl taxes. In 2003. 3591ots were assessed at half value because of linganon Table 4. Economic Impacts of Premium Resort-Residential Development in West Hawaii: Existing (2003) and Planned (2003 to 2008) Annual Item Existing Increase Average TOTAL Izooal (2003 to 2008) (2003 to 2008) (2008) Construction Sales Construction Expenditures $254,520.000 Indirect Sales, Bi Island $184,312.800 Total Sales. Big Island $438.832,600 Employment Construction Jobs 2,320 Indirect Jobs, Bi Island 1.984 Total Jobs, Big Island 4,304 Payroll Construction Jobs $135,485.937 Indirect Jobs, Bi Island $ 55.724,051 Total Jobs, Big Island $191.209,987 Operations Sales Expendtures $ 106.941.350 $ 123.537.900 $ 230.479,250 Indirect Sales, Bi Island $ 59.352,449 $ 68.563.535 $127.915.984 Total Sales. Big Island 166.293,799 192.101,435 358,395.234 Jobs, Big Island 1.745 2.016 3,761 Pa roll, Bi Island $ 48.713,013 $ 56,272.932 $104.985,945 DECISION ANALYSTS HAWAII, INC. Economic ¢nd Financial Consultancy specialty DAHI is an economic and financial consultancy that is committed deliverin_ hish-quality. objective analvsis to its client,. Established in 1979, the firm specializes in the economies of Hawaii and the Pacific basin. Services • Economic Development: community, regional and island development. compara- tive advantages of economic activities: exports, import substitution. support actici- ties tourism. recreation, ocean acticities, agriculture. forestry. aquaculture. energy. commercial and industrial acticities: infrastructure requirements: government sup- port services and incentives: erunomic model, and forecasts. • Land and Housing Economics: development forces and patterns, forecasts, values and rents. • Resource and Environmental Economics: resource pricing, incentives and disin- centives, valuation of externalities, and carrying capacity studies. • Market Assessments: market forces. market potential, prices, absorption rates. • Project Feasibility: profitability, project financing. cash-tlow analysis. • valuations: lease,. businesses. contracts, lost eurninas. • Economic Benefits and Impacts: employment, community benefits, demographic impacts, government revenues and expenditures. • Policy Analyses: planning repom, position papers, analysis. • Exper[ Witness Testimony: ~~overnment commission,. legislative bodies. contest- ed-case hearimis, court u~ials. Dr. Bruce S. Plasch, President • Education: - Ph.D. 11971 i and M.S. t 19661. Engineering-Economic Systems. Stanford University. specialising in economics, finance. and yuantitative analysis. - B.S. (19651. University of California, supplemented with an additional year of liberal arts. • Professional Experience: Hawaii-based economic and financial consultant since 1971. Contact • 'flailing Address: 1655 Kamole Street. Honolulu. HI 96F3'_l. • Office: ~i~081 373-936-1 Fax: ~~OH1 373-9590 E-mail: bplaschCa~hawuii.rrxom