Hidden Expenses

The unexpected costs of home building

Fees that local governments impose on developers and homebuilders can wind up costing homebuyers thousands of extra dollars. While some of those costs are easily recognizable, like water and sewer tap fees, others are harder to discern. 

Nationally, regulations imposed by governments at all levels account for 24.3 percent of the price of a newly-built, single-family house, according to estimates from the National Association of Home Builders (NAHB). Local governments may charge permitting fees, hook-up fees for water and sewer and impact fees. Governments also generally have development and construction standards that can directly increase costs to builders and developers which can then get passed along to consumers or cause delays that result in higher costs.

About 14 percent of the 24 percent increase in the final home price is the result of a higher price for the finished lot because of regulations imposed during the lot’s development, the NAHB reports. The remaining 10 percent of increase is the result of costs incurred by the builder after purchasing the lot.

One frightening aspect of the NAHB study is the conclusion that “the average cost of regulation embodied in a new home is rising more than twice as fast as the average American’s ability to pay for it.” But data on how these regulations impact the housing industry is limited, the NAHB admits. The NAHB conducted its own study as part of the March 2016 NAHB Wells Fargo Housing Market Index. 

Impact fees are often seen as one of the greatest reasons of increased costs. Impact fees are paid by a builder or developer to local governments to offset the cost of funding various types of capital improvements needed to accommodate new growth. Fees can be collected for things like transportation, water, sewer, municipal facilities (such as public works, planning, building and permitting, engineering and general administration), storm water, police and fire protection and parks.

Local impact fees charged to builders and developers have climbed by 45 percent since 2005, an average of $21,000 per home in 37 major markets, according to a study by housing-research firm Zelman & Associates in The Wall Street Journal.

The South Carolina Development Impact Fee Act gives municipal and county governments the right to adopt impact fees, but most have not adopted broad impact fees; Richland and Lexington counties have no impact fees. This past year, Lexington County discussed levying impact fees for road improvements, but nothing came of the effort. Most pass-along costs from those jurisdictions come from water and sewer tap fees and permitting costs. 

Lexington Mayor Steve MacDougall says, “The way the current law is written, the impact fees just aren’t workable. The time frame you have to use the funds is not feasible in most cases, and you’d end up losing those funds.” Lexington has talked about adding impact fees, he explains, but with the way the law is currently written, the town is just not interested in pursuing them. But the mayor did leave the door open if the law were to be changed. “However right now impact fees just don’t work for us in today’s world with the way things move unfortunately,” the mayor says.

Lexington doesn’t impose any other fees on a regular basis other than its Capital Contribution Fee for water and sewer tap. The biggest impact of development in Lexington is on traffic. The town always requests traffic studies of the area that will be impacted by the development, and the Department of Transportation will determine whether improvements need to be made to the road or the area around the development. The town will then negotiate with the developer to make those improvements. Some of that additional cost could end up in the final price of the homes.

The city of Columbia also does not use impact fees beyond those charged for water and sewer taps, according to Columbia City Councilman Howard Duvall, and they have not been discussed during his time on council. “The water and sewer impact fee does add on a little bit for the future growth of the sewage system,” he says. Howard, the former executive director of the Municipal Association of South Carolina, says several cities around the state have impact fees that are very well done. “Mount Pleasant was the first out of the gate with impact fees, and they have done extremely well with the administration of their fee,” he says.

Impact fees have been implemented in other high-growth areas in South Carolina. Both Rock Hill and Fort Mill, part of the booming Charlotte metropolitan area, have impact fees. Fort Mill began levying development impact fees on new construction permits in October 2015. The town collects impact fees for fire protection, municipal facilities and equipment and parks and recreation. 

The town of Hilton Head Island has also implemented impact fees. But low overall fees and a general lack of impact fees have helped keep South Carolina’s housing market one of the most affordable in the nation.

 Nearly 80 percent of homes in the Columbia market are considered affordable for families earning the region’s median family income of $64,100, according to the Housing Opportunity Index calculated by The National Association of Home Builders. Columbia ranked 68th nationally and 17th regionally on the index for the third quarter of 2016, according to the NAHB. Charleston, which is more expensive, ranked 133th nationally and 47th regionally, and the Greenville region ranked at 66th and 16th. 

While low fees and the lack of impact fees make much of South Carolina’s housing affordable, one of the issues that is driving up home purchase costs are business licenses that builders and other businesses must pay, says the Building Industry Association of Central South Carolina (BIA). 

A builder or developer in a metro area like Greenville, Charleston or Columbia may have to have as many as 30 different business licenses to serve the entire area, according to the BIA while a single small business that is a local service provider in a metropolitan area could have to have as many as 70 different business licenses to serve the entire area. A portion of that cost gets passed along to the consumer in the final price of a house, with the percentage varying depending on the licensing government. Because of the multiple jurisdictions and the way business licenses are calculated, figuring out just how much of that fee is passed along to a homebuyer is practically impossible, but it can be substantial.

“Because business license fee taxes are based on gross revenue and do not exempt intermediate purchases, they result in double, triple or even higher levels of taxation when one business purchases goods or services from another to be utilized in the production of a final good,” Andy White, 2016 president of the BIA, said in a statement from the association. 

Andy points out that “if a builder member sells a house for $150,000, he must pay a business license fee for the entire sale price on the home. Each sub-contractor (roofer, plumber, framer, electrician, painter, etc.) must also pay a business license fee for their gross revenues. Building supply companies, manufacturers, delivery companies and realtors must also pay a business license fee on their gross revenues.” In essence, each time the goods or services changes hands, it is subject to additional taxation.

“A $150,000 house has been taxed as if it were a $400,000 plus project,” Andy says. The results are higher prices for consumers and reduced business revenue.  In addition, the current system also harms consumers in a second way by lessening competition that would result in lower prices.  A recent study on reforming South Carolina’s system of business licensing by Dr. Russell Sobel, professor of economics at The Citadel, states that the typical household in South Carolina bears an additional $500 or more due to these fees.

Calvin Snow, immediate past president of the BIA, says that businesses must pass these fees on to their customers, and therefore every household in the state pays an average of $500 per year for these fees for no additional services. 

The association has worked with elected officials and small business owners to support a bill that would reform the business license process. “Local governments have no incentive to improve the system on their own; it must be done through state-level legislation, for which there is both historical precedent and a constitutional responsibility. Our neighboring states of North Carolina, Georgia and Florida have taken steps to substantially improve their systems by either eliminating business licensing, or they only require the fees to be paid where the business is physically located and/or 

applying to no more than 100 percent of revenue,” the association said in a press release. 

Russell concluded that the current system is damaging to South Carolina’s economy and local governments. He underscores the need for reform of the current business licensing structure in order to promote fairness and consistency among all sectors of the business community. 

“The licensing system has strayed from its original purpose — it does nothing to ensure the quality or legitimacy of a business, but rather exists simply as an administratively costly form of revenue for local governments,” Russell says. “The high fees, recordkeeping burden, compliance costs and need to maintain licenses in areas that may not even be served in a particular year are a substantial drain on the resources small businesses have to operate and grow as well,” Andy adds.

The South Carolina Chamber of Commerce has also weighed in on the issue. “We must reform the patchwork business licensing process that South Carolina’s businesses are required to follow. The current model costs businesses time and money. South Carolina must create a uniform business licensing process that will work well for businesses and local governments,” says Ted Pitts, chamber president and CEO.

Russell and leaders from the business community called for leadership in the General Assembly to make this reform a priority, noting that local governments derive their taxing authority from the state. 

Mayor MacDougall doesn’t see business licenses as a big issue for builders in Lexington. “We work really well with them,” he shares. “We allow a general contractor to come in and pull one business license to build the house and let him deal with the subs. I think that where they run into most of their issues is with their general contractor and subs. We want you to be able to do business here in the town, and we want to be able to help you any way we can. We are very amenable to that.”