There is a widely held belief in the community and local governments that levying fees and charges against developers merely distributes assets from overly wealthy developers to the community. However, in today’s development industry, this is a serious misnomer.
Today, nearly every developer is trapped between the maximum the market will pay for any building in a competitive real estate market and the minimum profit a financier must see in order to provide necessary financing for any project. If the market will not pay much more to cover additional fees charged by the municipality and the construction industry is so competitive that there is little opportunity to lower construction costs, then the only other source of savings is in the price of the land. Economists argue that ultimately municipal charges simply lower land values, however, in reality most land does not really fall in value due to increased charges. If in fact it did lower land values, the unintended consequence would be the lowering of the land values in the whole municipality, thereby reducing their overall tax revenues.
The economic reality however is that the developer does not pay the price of fees charged by a municipality because it is directly passed on to the market or the landowner. As such, there is almost no way to really “tax a wealthy developer” because they simply pass on the fees to either land owners or buyers. In reality while everyone is greedy in some way, developers do not actually become wealthy because they are greedy, rather they become wealthy simply because the profit margin in a project must be strong or it cannot attain financing and therefore will not proceed – and if the developer does a competent job, they will be rewarded with a decent profit.
In this context, municipal charges merely raise the cost of housing or lower the public tax revenues by lowering the price of land throughout the municipality – they do not redistribute wealth. A further unintended consequence is that wherever the developer is building homes for entry level buyers or others with lower incomes, the municipal fees simply tax the lower middle class – not the wealthy.
A final serious impact is that where a development company slows its work the real impact is felt by its employees, not by its owners. The relative percentage of wealth of a development company impacted by the success of any individual project in a smaller community is small, but the impact on the employees of that company who may get laid off impacts them significantly, and when this ripples through the local economy and supply chains, the negative impact is actually felt most by the community itself (families, local businesses, etc…). A much darker impact of this is that when development slows or evaporates, the local government then usually spends more tax dollars to try to stimulate the economy, thereby further impacting its fiscal health.