Tucson is making plans to waive the impact fees it charges private companies constructing affordable housing units in the city.
The move is part of the city’s plan to address the dwindling supply of affordable housing in the region, outlined in its housing affordability plan City Council adopted in December.
Tucson charges impact fees to entities constructing developments in order to fund the infrastructure and services needed to serve the new residential growth. The total amount depends on the scope and purpose of the development, which could increase the need for roads, parks and police and fire services.
The council last amended the code for impact fee subsidies in 2019, setting aside $1 million to subsidize impact fees for nonprofit affordable housing providers.
Since then, the city has seen only five projects utilizing the subsidy and spent about $265,000 in subsidies waiving the impact fees. City staff said more for-profit organizations are developing affordable housing in Arizona than nonprofit, limiting the current program’s reach.
“The issue right now is we’re not using the full amount that’s been allocated. We want to rectify that,” said Terry Galligan, the deputy director of Tucson’s Housing and Community Development Department. “We don’t want to leave any money on the table that could help bring more affordable housing to Tucson.”
At its March 9 meeting, mayor and council directed city staff to move forward with the same incentive for private entities and plans to make the change official at its March 22 meeting.
State statute holds that if a municipality waives impact fees for development, it must reimburse the amount waived. The city uses general fund dollars and its Highway User Revenue Fund to pay for the impact fees it cancels.
That means instead of developers paying the fee, city taxpayer dollars will.
The change is meant to lure in for-profit developers with the criteria they create units for households that earn 80% or less of the area median income and sustain that requirement for at least 15 years.
The median household income was $53,379 for the Tucson region in 2019, according to the Economic and Business Research Center in the University of Arizona Eller College of Management. The median sales price of a single-family home in Tucson was about $238,900 in 2019.
City staff said the impact fee subsidy for private companies will make Tucson more apt to receive projects with funding from the Low-Income Housing Tax Credit, a competitive federal program that subsidizes affordable housing. Projects with waived impact fees earn more points on applications to qualify for the credit.
In 2021, Tucson had two housing developments that received the competitive tax credit grant, and Phoenix had seven projects utilizing the funds, according to data from the Arizona Department of Housing, which issues the credits.
“If we can provide this, the competitiveness of projects that they’re wanting to develop in Tucson will increase,” Tucson’s housing department Director Liz Morales told City Council.
The city budgets for impact fee subsidies every year based on the number of developers they have received interest from. While that figure is yet to be known for fiscal year 2023, Galligan said, “We communicate very closely with the for-profits and not-for-profits so we have an idea of what needs to be set aside.”
City Manager Michael Ortega recommended the council put a cap on the number of developers taking advantage of the program. He said staff will look into “how we can get up to a million dollars of investment out annually.”
While most council members expressed support for the change, Councilman Steve Kozachik said, “I’m not sure it goes far enough.”
Kozachik mentioned that the impact fee waiver is currently calculated based on the amount of money from the private sector funding a development and does not take into account the public money from government agencies that is often used in affordable housing projects. Developers still pay impact fees for the portion of public money funding a project, so the councilman suggested offering the waiver for both funding sources.
“We’ve got this 80% of AMI (area median income). … Quite frankly, somebody earning 100% of AMI right now, that’s $53,000 a year. That’s about a $1,400 monthly payment. That’s not buying much in this market right now,” he said. “If we’re really trying to get more options on the table, I’m not sure we shouldn’t offer a waiver for publicly funded portions of a funding waterfall and consider looking at offering these for projects up to 100% of AMI.”
Based on Wednesday’s conversation, the Housing and Community Development Department plans to work the council’s recommended changes into a new impact fee waiver policy, but the first step is to make for-profit developers eligible for the program.
Ortega said expanding the eligibility may come up on the regular agenda for March 22 to make the April deadline for the federal tax-credit program’s applications.
“We’re really looking forward to changing this ordinance and getting it out to the public as soon as possible,” Galligan said.
