Permit to profit? New report says some cities over charging for building permits
The Housing Affordability Institute released its latest report, Building Permit Fees: Boosting the Bottom Line for Minnesota Cities, in August. This first full-length, single-subject paper reviews and raises questions about the proportionality of building permit fees in cities.
Under Minnesota law, municipalities collecting more than $5,000 in construction and development revenue annually are required to submit data to the Department of Labor and Industry (DLI). A review of the reports sent to DLI from 2014-2018 reveal that Minnesota municipalities gained at least $78 million in excess permit revenue.
“I make my decisions as a legislator based on facts, and we clearly have facts pointing to a problem,” said Rep. Barb Haley (R-Red Wing), member of the Legislative Commission on Housing Affordability. “I consider $78 million in overcharges to be an illegal tax on housing. This is something we have to address, in addition to many more, in order to bring down the cost of housing.”
Chapter 1300 of the Minnesota State Building Code dictates that building permit fees “be by legal means and must be fair, reasonable, and proportionate to the actual cost of the service for which the fee is imposed.”
While building permit fees are not required to be the exact cost paid by the homeowner, the fees should be roughly proportional, meaning municipalities should see only slight over- and under-collections from year to year.
In its guide to building code administration, DLI further outlines that building permit revenue is not to be used to raise additional general fund revenue, nor can it be used to fund projects and activities unrelated to building code enforcement:
“Each municipality is to evaluate local costs associated with the enforcement of the code. From this local evaluation, a fee structure can be established to cover associated and related code enforcement responsibilities” DLI guidance says. Again, “by Minnesota Rule, the fees are to be commensurate with the services required/provided; building permit fees may not be used as a tool to raise additional monies for the municipalities’ general fund…
“…Ideally, when a citizen purchases a permit, it is considered a “fee for service” charge that should be set-up to balance out at zero. Building permit applicants should not be charged additional or extra fees to support a municipalities’ general fund or other special interest projects undertaken by the municipality.”
“This is one of dozens of potential road blocks to affordability, and frankly, it should be one of the easiest to solve,” said David Siegel, executive director of Housing First Minnesota. “Find an efficient way to review plans and inspect projects for safety and durability – price those services fairly – and charge that price to the homeowner.”
“Today is about taking steps towards a better understanding of how we can begin to address and remove roadblocks that are keeping us from being able to supply our market with affordably priced homes,” said Chris Galler, CEO of Minnesota REALTORS.
“I’m all for local control, but this is local outof- control,” said Rep. Jim Nash (R-Waconia), member of the Legislative Commission on Housing Affordability. “In the backdrop of a housing affordability crisis, this is unacceptable. Building permits are supposed to be a fee-for-service, a pass-through if you will, not a way to fill city coffers. At a time when housing costs are increasing faster than wages, we need to find ways to make homes more affordable. For cities to knowingly be making the problem worse is appalling.”
“This latest report highlights the need for homebuilders and cities to come together to find common ground on policies that will promote the construction of more affordable housing,” said Rep. Steve Elkins (DFL-Bloomington).
“It is no secret: Minnesota lacks affordable homeownership opportunities across the state,” said Sen. Rich Draheim (R-Madison Lake), chair of the Senate Select Committee on Homeownership Affordability and Availability.
“Research shows that for every $1,000 increase in the cost of housing, 4,000 individuals are priced out of the market. Anything that artificially drives up the cost of housing, such as excessive permit fees, further increases that problem. Cities should not use these fees as an extra source of revenue.”
Whistleblowers Emerge with Permit Fee Concerns
Housing First Minnesota reports that this issue surfaced in 2018 when whistleblowers began contacting the organization to share their first-hand accounts of how permit fee income is used in their cities. Since last fall, Housing First Minnesota has met with a former planning commission member and local building officials who have shared stories of how permit fee revenue has been gathered and allocated. Each of these whistleblowers came forward independently, either to a legislator or to Housing First Minnesota directly.
“I have spoken with an anonymous whistleblower that has received immense pressure to turn building permits into an additional revenue source,” said Rep. Shane Mekeland (R-Clear Lake). “This individual said building officials are under immense pressure from senior city staff to make money for the city. He also spoke of how it is common for senior staff to raid building department budgets for unrelated purchases – rent and overhead for unrelated functions, snow plows, mosquito control, the fire department, etc. We need to know how the money that was collected was spent. The audits we are calling for will get to the bottom of that.”
Permit Revenue History: Legislature and Legal Actions
The legislature addressed the issue of permit fee revenue nearly 20 years ago when evidence emerged that some cities were overcharging significantly for permits, leading to surpluses. The legislature responded by requiring that municipalities report their building- and development- related revenues annually to the state. The transparency measure was created to serve two key objectives: public confidence in permit costs and to provide a picture of the math used by municipalities in determining a legally compliant, proportional building permit fee structure.
Housing First Minnesota, then known as BATC, sued the cities of Shakopee and Elk River for overcharging for building permits based on this reported data. The parties reached agreements with consent decrees. According to Finance & Commerce coverage of the 2006 settlement with Elk River, the League of Minnesota Cities said cities need to review their fee schedules annually for compliance with state law. The precedents set in the Shakopee and Elk River cases could be used to bolster the case for refunds. Builders contacted by Housing Industry News regarding these latest overpayments all reported that they would assist cities to ensure that homebuyers who overpaid receive money to which they could be entitled.
Call For State Investigations
While discussing the report’s findings with reporters, Rep. Nash called for state investigations into the matter. Later that day, Representatives Nash and Mekeland met with both the Legislative and State Auditors regarding possible state investigations into the report’s findings.
State Auditor Julie Blaha’s office has direct oversight over local government spending and could perform a special investigation or audit. Since DLI collects a state surcharge on building permits, if a city overcharged for its permits, the state may have collected revenue from improper fee calculations, which falls under the jurisdiction of Legislative Auditor Jim Nobles.
Legislative, DLI Action Likely
The Legislative Commission on Housing Affordability and the Senate Select Committee on Homeownership Affordability and Availability are both expected to address this topic before the legislative session begins in mid-February of next year.
One idea that building code officials and builders are already discussing is a shift from valuation-based permit fees to per-squarefoot rates. Currently, building permits must be based on the valuation of the project. Shifting to a fixed rate per square foot would help municipalities to create a more transparent fee reflecting the actual cost incurred for the inspections and plan review. Other states across the country have already moved in this direction.
Under such a proposal, municipalities would set a fixed per-hour rate for inspections. That rate multiplied by the square footage of the home would result in the fee.
Additionally, DLI is expected to change the format of its building permit report, requiring that municipalities provide greater detail annually. Legislators have also discussed giving DLI investigative powers related to permit fees.
“We look forward to working with legislators and others to fix building permit fees for Minnesota homebuyers. It’s frustrating that we first raised this issue 20 years ago and yet abuses continue. We’ve now got an affordability crisis on our hands and if we cannot solve a simple issue like building permit fees, how will we tackle the more complex issues necessary for housing affordability,” Siegel concluded.