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1. Extension of Servicesz of Kalispell Public Works Department Post Office Box 1997, Kalispell.- Mo tom 5990 1-1997 - Telcphom (406)758-7720 Fax (40 )758-793I MEMORANDUM ZO February 2004 To: Chris A. Kukulski, City Manager From: lames C. Hansz, P-E., Director of Public Works/City Subject: Developer Incentives for Making City Utility Inves A recent work session resulted in a request to further explore potential incentive options for the City to work with developers who make major utility investments that provide benefit to the City as well as to their specific project. Up to now City policy has been to expect these investments to be made as a cost of business in order to facilitate a developer's project with the City participating as it is able by paying the added cost of City -directed additions to capacity beyond that which is needed by the developer's project. The issue at hand is to determine whether there is a potential policy modification (City Extension of Services Policy) regarding meeting the costs of infrastructure that, while still requiring developers to fund the facility needs of their particular project, may recognize situations where doing so also adds value to the City's utility system or to other parcels lying between the original terminus of utilities and the end point of the project under development by the developer installing the mainline extension. There does not appear to be a perfectly equitable solution for every potential variation of this problem. However, there may be an alternative that, in many cases, may approach the seemingly opposed goals of equity and incentive. This discussion involves a .hypothetical water line, but is equally valid for an extended main sewer line. It centers on a different approach to determining excess line capacity than the incremental construction cost method presently used by the City. For water lines (and for sewer lines) it is possible to calculate pipeline capacities and equate those capacities to the number of residential units that can be served by the main pipeline. Likewise, water line fire flow capacity needs can be readily determined for a development. The core of this example rests on separating the normal flow needs of the new development, niEmoO10z0W.aoc expressed as a total residential/commercial demand, from the fire flow capacity required to protect all the lots within the development. This fire flow capacity is, in practice, shared by all the lots in the development and also may be shared by other projects that develop off the extended main line at a later date. The idea here is x'--` similar individual fire flow requirements do not add cumulatively to the fire flaw load on a main pipeline. (Some changes, i.e. from residential to commercial, do increase fire demand and require revised analysis.) Therefore, it is possible to apportion out the costs of a mainline extension. (one that is available to serve other properties as apposed to the pipelines within a development that are specific for the development) to the first developer and to any others corning at a later date based on the total number of units proposed for a development with respect to total unit capacity of the pipeline extension. The City does not need to predict the number of units that individual developers may propose to build. It does not need to forecast the number parcels that may be subdivided or the square footage to be developed or the front -footage bordering the pipeline. The pipeline capacity will determine the total units that can be built. A "first -in" developer would be expected to pay for his pro-rata share of the overall cost of the main line he is extending based on the size of his development. The remaining costs would be paid by others, in proportion to the size of their project when they ask to connect to the main line. All costs for infrastructure within a development should remain the full obligation of the developer. Any size increases within the development that are required by the City should continue to be paid for by the City IAW present policy. With this approach to proportionate costing, a developer who installs an extension could generally look forward to a partial reimbursement of the utility extension cost_ How would the reimbursement be handled? Three approaches are open for reimbursement: 1. The incremental part of extension costs for capacity to serve future growth could be immediately paid to the developer by the City when funds are available. The appropriate source of these funds would be SDC fees which are collected specifically to fund growth/capacity related projects. Reimbursement of the City's SDC account would be accomplished over time by establishing a per lot surcharge for the extension costs. This extension cost surcharge would be collected from property developers based on the number of lots in their proposed development. Present SDC fees were not set with this in mind, but the fund would need to be tapped in order to pay the cost. This could upset schedules for some planned growth -related CIP projects if other development projects were not timely enough to reimburse the SDC fund. An extension agreement would be needed and City Council action would be required to set the per lot surcharge for the pipeline. There would be accounting issues to be sorted out in order to assure proper handling of collected fees and that future development work always pays its fair share of costs. 2. All extension costs could be funded up front by the developer and the excess capacity portion would be reimbursed over time by the City via per lot surcharges on other developer's projects that desire to connect to the extended main. All other City SDC fees would remain in place and unchanged because these fees have been determined based on past City growth -related expenditures and fixture (CIP) project costs. An extension agreement would be needed between the developer and City. City Council action also would be needed to set the per lot surcharge for the extended pipeline. The down -side of this is the practical knowledge that for any development, all the costs of the development are spread among the various parcels within development in order to return these investment costs to the developer as soon as possible. The result of this reimbursement approach is to open the possibility that a developer could, under certain circumstances, recover investment costs twice; once when lots are sold and then again when reimbursements are made by the City. 3 _ Excess capacity costs could be reimbursed directly to the developer who installed the extension by other developers of properties when they seek to connect to the extended main. The City would need to act as a "gate -keeper" controlling access to the City's utility, essentially denying access until another third party, the original developer, is paid a fee. An extension agreement would be needed as well as action to set the per lot surcharge. This would be similar to the extension agreement provision currently in -place in the extension of services plan. The down -side of this approach is identical to the double -payment potential outlined in the second possibility except that the City would be out of the funds handling arena and acting solely as a gate -keeper who prevents access to a public utility until another party is paid a certain fee. An illustrative example may further assist to understand the way this could work. All the numbers have been pulled from thin air and are not necessarily representative of any actual project. This example reflects the second reimbursement alternative listed above which is felt to be most commendable for consideration_ mam©OI02004.doc A developer must install a $300, 000 water line to serve his project and the City insists it be over -sized to meet future development needs. Me water lane has a capacity to serve 600 homes. The capacity has been determined based on current standards for residential usage and fire flow. The developer's project actually involves 150 residential units. Therefore, there is capacity in the extended line to serve an additional 450 residential units. In other words, his investment has the potential to benefit an additional 450 homes proposed by some other developer(s). 7-he developer agrees to pay all the costs up front and enters into an extension agreement with the City to obtain reimbursement for this extra capacity. The City agrees to reimburse the developer far a five year period by using an extension cost surcharge per lot on connections to the extended line. The surcharge is determined by dividing the $300, 000 cost by the 600 residential units of capacity. The .surcharge is $50011ot and the developer's project is immediately charged for $75,000 (150 lots $500) which reduces the amount he can be reimbursed to $225, 000_ Over the next five years up to 450 additional residential units can be approved for development and connected to the water line installed by the original developer and reimbursement payments, collected from the later developers, . totaling. $225, 000 can be refunded to the developer. This amount totals 75% of the original investment cost refunded to him for having made the investment on the City's behalf. In addition, the City will collect all its normal SDC fees because these fees were determined based on past growth related City improvement costs (not developer contributed improvements) and on future growth related CIP projects that are listed in the City's Capital Improvement Plan. It is recommended that the City always try to configure agreements so that it is not acting as a "gate -keeper" preventing access to a public utility until a developer seeks out and pays a charge to another earlier developer. Also, when developing a reimbursement policy and when structuring future extension agreements, the City would be advised, as is now the case in current policy, to retain its right to further extend the pipeline without reimbursing the developer. The City's retained ability to extend the line will be a critical tool to ensure that further extension of the utility line can be done under similar terms with new developers as with the first developer. It will clarify that the original developer has provided a benefit to the properties his extension passed by, but that his work does not entitle him to an unearned return from properties beyond his development that another developer's fUture investment may enhance in a similar fashion. This approach could eliminate the on -going debate about main line size versus project need and paying for improvements that benefit others. The potential to recover some of the initial cost should offer an incentive to extend utilities and develop property. The down -side to this approach has been mentioned in the potential for a developer to financially structure a project in a way that could allow for double recovery of costs and for the City to have been the facilitator of it. The issue this formula does not address is the situation where a utility line is extended past a property to serve a new project but no additional capacity exists in the line, the full capacity of the line is needed for the developer's project. Hopefully this would not happen because the purpose of planning is to prevent this. But a situation could conceivably arise where such a situation would result. In that case the developer has provided no benefit to any adjacent parcels regardless of how the presence of a utility line may be initially interpreted because there is no pipeline capacity to serve others. Anyone desiring access to the utility would have the obligation to increase the pipeline size in order to add to its capacity hence the original developer's investment provided no benefit. Recognition of this important distinction is critical if a successful incentive program is to achieve the companion goal of equitability. In the final analysis there is likely to be no completely equitable method to extend lines and reimburse costs. And it is unlikely there is one that does not have some down side potential for the City, for the developer, or for someone else. We are aware that some members of the developer community have expressed the opinion that the Kalispell utility extension policy is broken and needs to be fixed. We do not share this view and base this on the most recent few years of very robust growth which has occurred in the shadow of the purportedly broken system. Further, we have discussed the issue with engineers who give technical support to the developer community, both in Kalispell and elsewhere in the country, and who appear to have no financial interest beyond their ability to provide technical services. From these conversations we have detected no prevailing sentiment that Kalispell is fundamentally wrong in its present approach for extending utilities. Current policy requires the City to pay for incremental over -sizing- We have limited our participation in developer extension agreements to those situations where developers pay up- front for City costs related to improving existing systems, most recently with development of the Willows Subdivision. These costs are then reimbursed via SDCs collected within the development and limited in amount to only what is collected within that development. memoOloza04.aac