ST. PAUL — After a district court ruled that a Woodbury fee used to pay for roads was illegal, the Minnesota Court of Appeals heard arguments last week that seek clarity on whether Minnesota cities can charge developers for public infrastructure needed as a result of a project.
The appeal, brought on by Woodbury, stems from a lawsuit filed by Martin Harstad, a New Brighton-based developer who Woodbury asked to pay roughly $1.3 million for road construction miles from his 183-residential neighborhood called Bailey Park.
Attorneys for the city and Harstad gave oral arguments June 21 in front of a three-judge panel in St. Paul, and raised questions on who should pay for public roadways: the city or the developer.
Last November, a Washington County district judge determined the fee — which Woodbury calls a major roadway assessment — was "unlawful and unenforceable."
The fees would have gone toward funding items like roundabouts and traffic signals to accommodate any increased traffic near the Bailey Park neighborhood, which is located south of Bailey Road near Radio Drive.
Harstad's attorney, Rob Stefonowicz, has argued the fees put a financial burden on developers because they're included on top of the costs of building residential streets, gas lines and sewers within a property.
"We're talking about projected improvements based on (the) whole development of this entire area years and years into the future," Stefonowicz said during oral arguments last week. "Some of them are four, six miles away from this development."
He added that the case mirrors a 1997 ruling by the Minnesota Supreme Court that found a similar fee the city of Eagan placed on properties to pay for roads was a tax rather than a charge.
The state's highest court determined the city didn't have the authority to impose the fee.
Attorney George Hoff, who represented Woodbury, defended the city's practice, arguing that state laws gives cities the authority to charge developers for building off-site roads and other public facilities needed to accommodate growth.
"We need people to be able to get out of their homes," Hoff said. "We need people to be able to flush the toilets, so there's an infrastructure need that needs to be developed."
Hoff also argued any decision by the court would be premature since Harstad's project never went before the Woodbury City Council.
The district court ruled the Bailey Park application was incomplete.
The cost of development
In 2011, the Woodbury City Council approved a policy giving the city the ability to assess and collect fees for roadway construction costs as a property develops.
Since then, developers building in Woodbury have paid about $5.4 million in major roadway assessment fees, according to a review of developer contracts.
The city calculated its fee at about $20,000 per acre in the area south of Bailey Road where Harstad planned to build the Bailey Park neighborhood. Woodbury determined the money it collected from developers would cover costs for new roadways as the area fully developed.
A developer also has to pay the fee before getting the City Council's approval for their projects.
Stefonowicz said the process deprived Harstad of the development moving forward and caused delays.
The city declined to comment on the case, but issued a statement saying its road fee allows it to assure new developments are made in a "safe, orderly, and cost effective manner," and that Woodbury is able to assure fees are "equitably paid as part of the development process."
David Siegel, the executive director of the Builders Association of the Twin Cities, hailed Harstad's case as a landmark that may change how cities levy fees to pay for public roads and other infrastructure.
The lower court determined Woodbury's roadway assessment was an impact fee, a charge cities impose on new or proposed developments to fund public infrastructure as a result of new developments.
Some experts point to the benefits of such fees for cities with growing populations because they help shoulder the costs residents pay for public projects that are needed as a result of development.
But critics like Rochester home builder Frank Kottschade say unnecessary fees drive up the cost of housing and have made buying homes unaffordable for people.
"The bottom line is affordable housing," Kottschade said. "The more fees cities attach on developing of lots, the more that prices people out of the marketplace."
For Harstad, the fees Woodbury wanted to charge him came out to about $6,700 per home.
Citing data from the National Association of Homebuilders, Siegel said for every $1,000 that's added to the cost of building a home, some 4,000 Minnesota aren't able to qualify for a mortgage on a home.
Approximately 25 percent of the cost of a new home is due to regulatory impact, Siegel said, and those rates have increased in the years following the 2008 recession.
He added the case's outcome will have a regional impact within Minnesota and surrounding states because cities often look toward one another when deciding how to raise money for roads.
"You really do need a confirmation that this is outside of boundaries of what a city can do, so other cities don't do it," Siegel said.
The Court of Appeals will release its opinions within 90 days of the hearing.