Watertown aims to spur new home construction

The Watertown City Council last week approved a fee deferral program for home builders and developers that the city hopes will help spur renewed residential growth in several of the city’s subdivisions.

Plagued by a housing crash that resulted in only 19 new home permits in Watertown from 2008 to 2012 — including just one last year — the city has made renewed growth a top priority for the city. Watertown officials recently began a dialogue with local developer Arnie Estebrooks, owner of the mostly-empty Forest Hills development, regarding ways the city could perhaps entice further development in the city without placing a financial burden on current taxpayers.

The discussions resulted in a New Home Construction Activity Program (CAP), which will allow home builders to defer roughly two-thirds of the permitting fees associated with new home construction until the certificate of occupancy is issued to the new owner. Currently, all permitting fees are collected when the new home permit is issued.

“If it’s going to help some of our builders and developers get going, I’m all in favor of it,” city council member Mike Walters said.

The new program will allow storm water fees, Sewer Access Charges (SAC), Water Access Charges (WAC) and park dedication fees to be paid upon closing rather than up front. It will affect approximately $10,000 in fees for a typical new home permit, which typically includes about $15,000 in fees overall.

The new program will be launched with an initial term of one year, giving the city a chance to re-evaluate at that point.

“If things are going very well, it may be something we decide to continue after a year,” City Administrator Luke Fischer said. “Or, if the program is unsuccessful or underutilized, perhaps it’s something we discontinue at that time.”

Because the time between when the initial building permit is issued and the time the certificate of occupancy is issued is typically only about 90 days, the new program is estimated to save builders only about $400 in financing charges in terms of real dollars.

However, developers like Estebrooks likely stand to benefit the most from the new program. With construction loans more and more difficult for builders to come by, Estebrooks has often been financing construction costs out of his own pocket in an effort to get any kind of construction going in his development, which still has hundreds of vacant lots.

“In order to make this work, what we have to do is become the bank for the builder, because the builders can’t get construction loans or any financing” Estebrooks said during last week’s city council meeting. “What we do is basically give them the lot for a buck, and if they’re building a build-to-suit, then we carry the construction loan for the materials and try to get going so we can keep them in here. The idea is that if they can’t get construction loans in other areas, they know they can get them in Watertown.”

Estebrooks is currently involved with one project in Forest Hills. However, the financing method he alluded to can become much more burdensome if a handful projects are going on at once. Essentially, that’s what the city’s fee deferral program is aiming to address.

“It’s makes our job a little bit easier, especially if we have to start carrying four or five or six of these construction loans at a time,” Estebrooks said. “It’s all cash out of pocket.”

The fee deferrals do not represent any additional cash outlay for the city, because those expenses were already incurred by the city. The new plan simply changes when the city will collect that money.

However, the other portion of fees associated with a new home permit — permit review and inspection fees — represent an immediate expense to the city. Watertown, under its agreement with Delano to share a building inspector — is obligated to pay for those services rendered up front. That means those fees, typically a little more than $4,000, will still need to be paid by the builder at the time the permit is issued.

The remaining SAC, WAC, stormwater and park dedication fees, or about $10,000, would not be paid to the city until the home is complete and ready to be occupied.

The largest risk to the city with the new program is that a home would be completed and ready for occupancy, but the potential buyer would not have the cash to cover the $10,000 in fees. To protect against that issue, the new program will require both the builder and developer to sign a document indicating it is their responsibility to notify any potential homebuyer up front of those outstanding fee charges. To further protect the city’s interest, both the water meter and certificate of occupancy would be withheld from the property until the fees are paid in full.

Like in many communities around the state and the nation, Watertown has felt the affects of the recent housing crash in a big way. Slower than projected residential growth led to shortfalls in the city’s water and sewer funds, leading to significant rate increases earlier this year.

As other cities in Carver County have seen a recent renewal in residential building, Watertown has been slower to catch up. In 2012, permits for new home construction in Carver County as a whole were up 84 percent from 2010. However Watertown issued just one new home permit in 2012.

Much of the rise in new home permits in Carver County has been seen in the eastern portion of the county, but Waconia and Mayer both saw significant increases in 2012 as well. However, Watertown has issued fewer new home permits since 2007 (37) than it did during any single year between 2002 and 2006. The city issued a high of 82 permits in 2002, 73 in both 2003 and 2004, 46 in 2005 and 44 in 2006.

That number plummeted to 15 permits in 2007, before falling to two the next year. Watertown hasn’t issued more than six permits in any year since. Estebrooks’ Forest Hills development has been especially troubled.

“When we started that project (in 2004), we had 25 builders in there,” he said. “They were just knocking our doors down. Most of those builders now have gone out of business or have gone into other areas.”

Estebrooks’ troubles largely stem from the fact, ironically, that he owns the development free and clear. Other developments in nearby cities have been taken back by banks, which have been slashing prices to get rid of lots.

“The banks need to get rid of their inventory,” Estebrooks said. They can’t carry it forever, so they’re just bailing out of these lots for 13, 14, 15 thousand dollars. They’re a corporation, and we’re just a small company. We have had great difficulty competing with them the last five or six years.”

Estebrooks said he’s slashed his prices by about 33 percent over the last couple years, but even that measure hasn’t been enough to compete with the prices banks have been offering. However, Estebrooks said he’s made it through the worst, and believes a turnaround is within sight. He said the city’s new program can only help.

“We’ve tried to weather this storm,” he said. “We’re into this now for six or seven years, and we’ve been through the worst. We’ve bled, but now it’s starting to come back. For us to start firesaling now isn’t the answer. We had to get something that would work for everybody, and I think this program will work.”

 

Contact Matt Bunke at matt.bunke@ecm-inc.com

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