Carl Circo from the University of Arkansas Law School joined us this morning to discuss the question: “Should Owners and Developers of Low-Performance Buildings Pay Impact or Mitigation Fees to Finance Sustainable Development Initiatives?”
He began with a confession, “My name is Carl Circo and I’m a green building pessimist.”
Furthermore, there may be constitutional issues in relation to “linkage fees”. Mitigation fees are intended to compensate for damage done by construction. They are used as a method of sustainability by local governments. Sometimes used in conjunction with tree escrow funds – making private organizations donate to the fund in order to replace trees knocked down in order to construct.
This raises questions like should private organizations have to pay the intense costs of trying to sustain the heavy environmental impacts of construction? And, there are limits to developer fees. The policy raises questions about the authority of a city to impose development fees– alocal jurisdictional question. The U.S. Constitution has limits on the use of linkage mitigation and impact fees. There is heavy controversy in this realm.
Moreover, we must consider how the conventional state land use limitation on the use of developer fees might apply to aggressive green building programs financed through impact, linkage, or mitigation fees. An important point to keep in mind: fees are economic tools used to change the behavior of the private sector. Developers are driven by financial projections, taking into account anticipated revenues in conjunction with the costs the developer must bear (negative externalities from the use of traditional v. new business approaches).
State land use law has developed a rational relationship test for determining the development fees to cover costs. The police power must be exercised in a fair, reasonable manner. What we have is dual rational nexus test. Primary limit: impact fee, for example, may be no more in amount than the governments reasonably related fees (to the development). Developers are then required to pay the fee must in some way derive a benefit from the use of the fee by the government. This cannot be a “rough guesstimate”… must be more than a guess – a reliable consideration, may need a comprehensive study, or point to an existing body of knowledge to develop a true, existing relationship. And, they must establish a legitimate basis for the charge (size of the charge). They must be able to show that the funds are being used to address the infrastructure need.
The 2nd prong: developer paying the fee must enjoy some benefit from the fee collected. This is a legitimate formula for indicating the impact a particular development will have on sustainability. They must have a program to account for the fee that shows the fee is being used to further sustainability.
Which raises the question– may cities, under the dual rational nexus test use these fees to finance aggressive green building programs?
Circo closed by saying that he is worried about the level of capital investment needed to leave natural capital to enjoy the same level of social welfare that our generation has been able to enjoy. The use of developer fees might be one small way to finance that local development.
Circo is still left wondering how to finance the rest of the costs. Because of this, Circo remains a pessimist because he doesn’t know how to and doesn’t think we have resolve to do what we must do.
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Another series of questions for Prof Circo:
How do we value be clean water? How do put a price tag on the clean environment? Who makes that decision? How do we decide who has to pay for it? To the extent that these costs are pushed forward, at what rate do we discount the cost for future generations? What role must local communities and developers play in deciding these questions and enforcing the policy solutions?
These are important and vexing questions, but they are ones that environmental economists and sustainability theorists have been addressing in some fascinating ways for some time. On how we might meaningfully value clean water or a clean environment, take a look at some of the natural capital literature, such as Jan V. Geldrop & Cees Withagen, Natural Capital and Sustainability, 32 Ecol. Econ. 445 (2000) and Richard W. England, Should We Pursue Measurement of the Naturual Capital Stock?, 27 Ecol. Econ. 257 (1998). Some more recent work on this topic received attention in the popular press late last year, although I do not have that reference readily at hand at the moment. Who decides, and how do we pay? Those are political questions. Concerning future costs, both Robert Ellickson and Richard Posner have discussed the present value question from the perspective of economic analysis of property, with Posner acknowledging that justifications can be advanced for a relatively high rate or for zero. I deal with these questions in an article that I plan to post to SSRN soon. I’ll post a supplemental comment when I that is available. On the last question, concerning the role of government and the level of government and the business case for green buidlings, take a look at 112 Penn St. L. Rev. 731 for my thoughts. I do not know whether it makes sense to try to place a dollar value on natural capital, but I think it is critical to decide, as a policy matter, whether or to what extent sound policy supports applying a discount rate to the estimated costs that today’s unsustainable practices impose on future generations. A related empirical question is whether we now have the ability, or can project that humans ever will have the ability, to replace or replenish natural capital through current investment or savings.