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Posted on 11/01/2003 7:39:47 AM PST by SheLion

SAN FRANCISCO (CBS.MW) -- Budget crunches at all levels of government are likely to come home to
  roost on real estate owners and homebuyers as municipalities are forced to raise property taxes and
  boost fees on home construction, experts argue.

  "We are so pressed at state and local levels for money ... that it is going to
  be tougher for cities and counties and other local units of government to meet budgets," said Maureen McAvey, a
  senior resident fellow at the Urban Land Institute, a Washington land-use education and research organization.

  In high-growth areas, the squeeze will not be as pronounced, McAvey said, because new development will
  naturally raise the tax base. But in most areas, harder and more potentially divisive decisions will have to be
  made, she said.

  "Sales taxes and sin taxes have really raised a lot of revenue and helped hold off on increases elsewhere. But in
  most place those taxed have reached their upper limit," said Ellen Marshall, a vice president at Patuxent
  Consulting Group in Washington.

  "That's going to put pressure on property taxes in the next few years," Marshall told a session of the Urban Land
  Institute here this week.

  In their search for money to replace federal and state cutbacks, local governments may also turn increasingly to
  higher impact fees -- charges levied on developers and homebuilders -- and to additional taxes on services like
  real estate and mortgage brokerage.

  Those two moves could add the cost of buying or selling a home, and would likely drive up the cost of new
  housing, a panel of realty experts agreed.

  "If these budget deficits continue, I see more and more impact fees coming," said J. Ronald Terwilliger, national
  managing partner in Atlanta for development firm Trammel Crow.

  Fees expand -- and explode

  Already in states like California, fees run as high as $30,000 per developed unit, Terwilliger said, on top of land
  costs of about the same amount. "It makes it pretty hard to develop any affordable multifamily housing starting
  from that base," he said.

  Terwilliger pointed to other places where real estate has been targeted to produce more revenue: New Jersey has
  boosted its realty transfer tax, paid when a house changes hands, by 50 percent; property assessments in
  Virginia have risen double digits for the last several years, boosting taxes; Raleigh, N.C., has added a $1,000 per
  unit school fee; and in southern Florida builders must now pay a "concurrency" fee of $10,000 per multifamily
  unit, along with a $16,000 water and sewer fee.

  "We're seeing a lot of different, creative uses of these fees. And we're just at the beginning," he said. "Those fees
  either increase the cost of what you build or detract from the income you can earn."

  Nicholas Pappas, president of homebuilder K. Hovnanian Companies of California, (HOV: news, chart, profile)
  said impact fees in his state have tripled in the last decade, from about $10,000 per home to $30,000 or more.

  "These are not seen as a tax, so they don't hit the radar screen of tax increases. They are buried in the one-time
  cost of housing or the square footage rent of a commercial property, but they are not a matter that become a
  political hot button at all," Pappas said.

  "The problem is that once they are established, they never seem to go away, even if the impact [they were
  designed for] changes."

  Real estate bears the brunt

  The reliance on real estate to fund local government is nothing new; already, 70 cents of every dollar of local tax
  revenue is derived from real estate, said Jeffrey DeBoer, president of The Real Estate Roundtable, a Washington
  lobbying group.

  But that dependence can have unintended consequences, McAvey pointed out. Because sales taxes have
  become so coveted, "every little municipality pushes for its own strip malls and mini-centers to get whatever sales
  tax they can," she said.

  "You go out and look and all these centers are just two-thirds full two years after they were built because there's
  so much retail out there."

  Unlike the federal government, states and local authorities generally must present balanced budgets ever year,
  returning money in the surplus times but forced to make cuts when times are tough.

  For many, property taxes have been the savior in the downturn of the last three years because housing has been
  the one area of the economy that has percolated, sending home prices -- and thus property-tax revenues --
  higher.

  Those in real estate say only overall economic growth that includes new corporate hiring can lessen the
  dependence on property fees.

  "Hopefully the good news on the gross domestic product, and then on jobs, will help," Terwilliger said.

  Steve Kerch is the real estate editor of CBS.MarketWatch.com in Chicago.

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