Growing Twin Cities suburbs may have to find other ways to pay for new roads following an appeals court ruling Monday invalidating a roadway fee charged by the city of Woodbury.

The case attracted the interest of Twin Cities homebuilders and the League of Minnesota Cities, which said its outcome could affect development across the metro area — pending a possible appeal. A number of other cities charge similar roadway fees, which Woodbury levies against housing developers to improve the city's road network outside a new subdivision.

Homebuilders say the fees raise the price of housing in the region. Cities say they are needed to pay for infrastructure that supports growth, like paving gravel roads that lead to the new neighborhoods.

"This says to cities, 'You've got to take a different look at how you're doing this. You're going to have to fund these roadway improvements in a different way,' " said David Siegel, executive director of the Builders Association of the Twin Cities. "You can't put these on the backs of a development agreement and a developer."

Justin Templin, an attorney representing Woodbury, said the city is considering whether to appeal the matter to the Minnesota Supreme Court.

"I think it's got statewide implications because Woodbury's not unique in the sense of other communities that are trying to figure out how to pay for infrastructure … without soaking their tax base for those costs," Templin said.

The case was filed by developer Martin Harstad, who had proposed building a 183-home development in Woodbury. The "major roadway assessment" was estimated to be $1.3 million.

Woodbury, a fast-growing suburb, has collected about $5.4 million in the fees over the last five years.

It did not collect from Harstad, who sued during the application process. Monday's ruling by the appeals court upheld an earlier decision by the district court.

"We're in a position where we either have to deny development from going forward and become completely anti-growth, or figure out another way to collect the money," Templin said.

Who should pay?

The ruling marks at least the third time in recent history that Minnesota courts have tossed similar fees.

In one of the earlier cases, the Minnesota Supreme Court invalidated a "road unit connection charge" imposed by Eagan in 1997, saying it exceeded powers granted to the city by the Legislature.

The Appeals Court found Monday that a similar argument applied to Woodbury's fee.

A League of Minnesota Cities spokesman said in August that the group does not track how many other cities use similar development fees to pay for infrastructure upgrades. But a review of some other cities shows that Cottage Grove, Prior Lake, Chanhassen and Dayton appear to charge similar fees.

Chanhassen City Manager Todd Gerhardt said they do not believe their fee is at risk because it is voluntary. Developers pay it about 90 percent of the time, he estimated.

"I've personally sat down and negotiated with the developers. I said you do not have to pay this," Gerhardt said, adding that local taxpayers end up paying if developers do not.

Siegel, of the builders association, said they plan to encourage other cities with fees similar to Woodbury's re-examine them.

John Adams, a former University of Minnesota professor who has studied the impact fees, said property taxes from new developments typically aren't enough to cover the cost of needed infrastructure projects.

Charging a fee would encourage more compact development, he said, since developers would bear the burden for extra infrastructure costs.

"By developers and their customers failing to pay the full cost of the impacts that the developments create, then we are really in effect promoting the kind of low-density sprawl that other policies are trying to curtail," Adams said.

Susan Naughton, an attorney for the League of Cities, said the case has broader significance because it interprets state statute governing new subdivisions as not allowing mandatory fees for infrastructure outside the development.

"The statute applies to all 853 cities," Naughton said. "We think this is an important issue. We think the district court and the court of appeals both adopted a very restrictive interpretation of what cities' authority is under that subdivision statute."

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