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As Long as We Remember...

May 31, 2011

Making Housing Pay Its Way

Earl 'Rocky' Mackintosh

The debate over whether residential real estate growth pays for itself has been reignited over the last few months. The Frederick Board of County Commissioners have been moving forward with a school mitigation proposal for future housing projects that have been stuck in the Catch 22 of its very strict Adequate Public Facilities Ordinance (APFO).


The commissioners have sought buy-in and feedback from the Board of Education and the leaders of the county's 12 municipalities. Frederick City in particular has been seeking how it can generate revenue to assist in the specific needs of county public schools within city limits such as Frederick High School, which has not had a major renovation in many, many years.


The basis of the county program is to provide developers of new housing projects with a new option to move forward under the county's APFO. In cases where a proposed residential development is within a school district where the elementary, middle and/or high school is projected to be overcrowded, the land developer will have an opportunity now to pay a "Construction (mitigation) Fee" for school improvements, renovation or expansion in addition to the traditional impact fee used for new school construction.


In the land development world, this is known as Pay-Go or Pay and Go -- simply put, pay an extra fee to proceed.


The APFO school mitigation plan proposes to assess an upfront mitigation fee at the time of plat approval on all planned housing units in the development. The impact fees will continue to be assessed at the building permit stage.


Currently if even one of the schools within the district of the proposed development is projected to be overcrowded, the developer can either foot the bill to build a new school or an addition to resolve the problem … or just wait for what can often be years (even decades) until the problem is resolved by other means.


Small residential developments of six lots or more typically have suffered from the latter scenario, but large projects of over 2,000 units by sheer numbers can often find the margins to address school needs.


In the real estate bubble days of five years ago, the developer of the Linton Farm on Ballenger Creek Pike was able to build $10 million worth of Tuscarora High School to satisfy the APFO test.


That was then … this is now.


In today's reality, zoning within Frederick County and its 12 municipalities have been planned in such a manner that the days of the large planned unit/neighborhood development projects are almost over. In addition, county-wide, we are experiencing some of the lowest housing starts in several decades: fewer than 800 permits in 2010, which is less than 50% of what the previous Board of County Commissioners, under President Jan Gardner, approved in its 2010 Comprehensive Plan - 36,000 housing units within twenty years (1,800 per year).


The other reality: it is a fantasy to anticipate that there will be another real estate bubble of insatiable housing demand and exponential price increases within the next 20 years.


So, you ask, why should Frederick County be concerned if it does not meet the housing permit benchmarks set in the 2010 Comp Plan?


The sad truth is that "Frederick County needs the money!" as stated by current commission President Blaine Young. Previous boards worked very hard to curb the number of new homes from a 25-year average of about 2,600 units to the target of 1,800 per year. Since the county's APFO plan was adopted in 1991, school impact fees from all those units have been used to fund any number of new schools throughout the county.


In anticipation of state reimbursements, as well as a steady stream of impact fee income, previous commissioners floated bonds to forward fund this new school construction. With state money now only trickling back to the county coffers, the impact fee income is vital to covering the bond debt service, much less the banking of funds for future school construction for alleviating overcrowding problems.


While the real estate market was living the good life up to 2006 and even on much of its down slide thereafter, previous boards were spending beyond their means. To make up the spending difference they siphoned money from various rainy day funds to cover expenses – creating a serious structural deficit.


But now those accounts are nearly dry, property tax revenue is off and impact fees are more critical than ever before to cover the cash flow needs. As one local land use attorney told me, "the dirty little secret is that Frederick County is now addicted to impact fee income."


Without a steady flow of school impact and mitigation fees from new homes, the school problems this county faces will likely persist. The only way the county can generate more impact fee income is to create a method to allowing projects to pass, or mitigate, the school test provision of the APFO.


But won't this mitigation proposal open the gates and flood the already existing over capacitated schools to higher levels of congestion?


County staff included in the proposal an overcrowding cap of 120%. Any applicant within a school district that meets or exceeds this figure will have to wait until that percentage drops. This may not address the issue in full, but there are other tools out there.


Frederick County Public Schools system-wide operates at a rate 88% student capacity.


Frederick County families have a tradition of being extremely loyal to their schools and are typically not happy with redistricting plans. While the difficult task of redistricting is by far not the only means of solving the problem of overcrowding, in trying financial times like we are experiencing now, sacrifices are being made in all sectors of economic and personal lives.


In the end it comes down to a fiscal balancing act. Frederick County Public Schools population will continue to grow even if all new housing ceases tomorrow. So, the problem of overcrowded schools and deteriorating structures will persist.


Without a stronger flow of new homes that at least meet the targets of the 2010 Comp Plan, the funds vital to addressing the school infrastructure needs of our community will likely worsen with the flow of impact and now mitigation fees.


There is no question that the debate will wage on as to whether housing pays for itself, but in the reality of the financial struggles in Frederick County today, a plan to allow a modest increase in housing starts will go a long way to providing needed funding for improving public educational facilities.


Rocky Mackintosh is president of MacRo, Ltd., a land and commercial real estate firm based in Frederick, MD. He also writes for MacRo Report Blog.

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