Olympia, like all of the Pacific Northwest and much of the US, is in the middle of a homelessness crisis. One of the drivers of this crisis is housing prices. In Olympia median list prices for homes has jumped from $260,000 to $355,000 between January 2010 and January 2019 (Zillow). And a major driver of increasing home prices is development fees.
In mid-2018 my wife and I were looking for ways to invest some of our money locally, and we found an empty parcel in Olympia that was zoned for two housing units. When we contacted the city to get an estimate of the development fees we would have to pay, we learned that each new dwelling unit in Olympia costs $40,000 in various fees, like impact fees, utility hookups, inspection fees, etc.; and on top of that, there could be additional expenses, like paying to extend sidewalk to the nearest existing sidewalk or school (Olympia fee schedules; look for the “building permit fee schedule” PDF). Lacey, Tumwater, and Thurston County have similar schedules.
Fees like this make it impossible to build new affordable housing. Builders live in a boom-or-bust world; they have to make significant margins on each unit if they’re going to survive the next market downturn. If you can build a house that’s worth $150,000 for $100,000, that’s great; you’ve made a margin of $50,000 on that house. If you add $40,000 of impact fees on top of that, a $10,000 margin might not cut it. But you can’t sell a house that’s worth $150,000 for $190,000 and just pass along the cost; you have to build a house that’s worth $190,000 to sell it for that amount, and that costs more money. So development fees don’t just increase new housing costs by their exact dollar amount, they increase it by more than their dollar amount, as builders have to spend more money to make their projects more attractive so they can sell them for more. Fees of $40,000 might add up to $60,000 or $80,000 additional cost for new housing units.
To combat this, local governments should adopt progressive fees, the same way the federal government has a progressive income tax. Instead of a flat amount per unit, fees should be structured as a percentage of the expected final sale value, with step increases at each value increment. For instance, the first $100,000 of expected sale value might be levied a 10% fee, the next a 15% fee, and the next a 20% fee. For a $100,000 home the development fees would be $10,000; for a $200,000 home the fees would be $25,000 ($10,000 from the first $100,000 of value + $15,000 from the second $100,000 of value); and for a $300,000 home the fees would be $45,000 ($25,000 from the first two $100,000 of value + $20,000 from the third $100,000 of value).
A progressive fee setup like this would encourage developers to build affordable units where they are currently not profitable, without starving local government of the revenue needed to properly regulate development. It could even promote development with mixed higher- and lower-income units, as developers seek to minimize their fee bill (mixed income housing plays a key role in reducing chronic poverty).
There is no single solution to complex problems like homelessness, and progressive fees would not immediately solve the issue. It wouldn’t be easy to implement, either, as local governments would have to make major changes to how they assess and charge fees. But progressive fees could reshape the housing landscape of our rapidly growing region for the better over the next few decades, and for that outcome we should be willing to do some hard work.