Growing suburbs’ strategy of paying for new roads and other infrastructure by charging builders fees for development could be upended by a legal challenge before the Minnesota Court of Appeals.

A developer’s lawsuit against Woodbury arguing the city’s roadway fee on new subdivisions is illegal has attracted competing court filings from the metro area homebuilders association and the League of Minnesota Cities. At issue is whether developers or taxpayers should bear the brunt of road projects that are needed to accommodate growth but are located outside of a new subdivision.

“I’d say this is a landmark case,” said David Siegel, executive director of the Builders Association of the Twin Cities. “Probably one of those rare cases that comes along every decade or so that we think has really powerful ramifications across the Twin Cities.”

Woodbury charges developers a “major roadway assessment” fee to help cover road improvements outside of a subdivision, such as paving a gravel road or adding additional lanes to handle the added traffic.

That amounted to $1.3 million for the 183-home development Martin Harstad planned to build in the city.

Harstad sued, and a district court judge ruled in November that the fee was illegal because it is not allowed under state law. The city appealed.

Attorney George Hoff, who is representing the city, said state law expressly allows them to charge the fee. “Common sense says you have to do it,” Hoff said. “Think about 300 homes exiting onto a two-lane gravel road. On its face, it’s ridiculous.”

The League of Minnesota Cities wrote in a filing earlier this year that the case “raises legal issues with statewide significance.” If the ruling stands, cities would instead need to pay for those projects with general tax dollars “even though the new development is unquestionably driving the need for them.”

A League spokesman said the group does not track how many other cities use these fees. But a review of some other cities shows that Cottage Grove, Prior Lake, Chanhassen and Dayton appear to charge similar fees.

John Adams, a former University of Minnesota professor who has studied the fees, said the initial property taxes paid by new homes aren’t typically enough to cover the extra road costs. Without the fees, he said, the burden for paying for the city’s expansion falls on existing residents.

“In other words, there’s a subsidy that goes to the new development, and it comes out of the old businesses and the old residents in the community,” Adams said.

On the other hand, Siegel said, the fees raise the price of new homes.

“What this is doing is adding a significant dollar amount to each parcel of land within that development, which ultimately gets passed on from the developer to the builder and ultimately to the home buyer,” Siegel said.

It’s not the first time courts have weighed in on how cities can pay for their road costs. A district court judge tossed Roseville’s fee on developers to pay for roads in the Twin Lakes area in 2013. In 1997, the Minnesota Supreme Court ruled that Eagan’s “road unit connection charge” amounted to a tax not allowed by state law because it wasn’t directly tied to the cost of providing services.

Harstad’s attorney Peter Coyle said the case against Woodbury could reinforce that 1997 ruling, known as “Country Joe” after the developer who sued.

Woodbury argues that the Country Joe precedent does not apply here, however, since Woodbury’s fees are individually negotiated based on the demand expected from each development. The city collected $5.4 million in such fees over the past five years.

Some disagree with the fees from a public policy standpoint. Chuck Marohn, whose Brainerd-based organization Strong Towns promotes healthier city budgets, said such fees allow cities to build roads their tax base may not have the resources to maintain over the long term.

“If your tax base doesn’t generate enough ongoing wealth to maintain your infrastructure, it doesn’t matter how you pay for it initially,” Marohn said.

A ruling on the case is expected by mid-September.

 

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