Concern builds as new homes don't

Hutchinson News, The (KS), 2014-08-10

Aug. 10 --Data from the U.S. Census Bureau shows that Hutchinson's housing starts are lagging well behind a number of other Kansas cities, including some much smaller than Hutchinson .

So far this year, builders have taken out only three building permits for single-family houses in Hutchinson .

Compare that with Salina , whose population of 47,605 is about 5,600 greater than Hutchinson . Salina has issued 25 building permits for single-family homes, according to the Census Bureau .

Hays , population 20,500, has issued 27 single-family permits this year. Junction City , population 23,150, has issued 40 permits this year.

Maize, whose population is about 4,200, a tenth that of Hutchinson , has issued 55 permits this year. Maize, right in the path of Wichita's northwest growth, may be an anomaly. But its growth hasn't gone unnoticed, given that a number of people commute to work in Hutchinson from Maize and many more from Hutchinson pass through Maize on their way to shopping, dining and entertainment on Wichita's northwest side.

Why Hutchinson's home building lags, despite a city incentive program that rebates 100 percent of the city's portion of the property tax for five years for any new single-family home completed before Dec. 31, 2014 , is a question with no clear answer.

Builders and developers, bankers and real estate professionals have a number of theories, all of which have some validity: Property taxes are too high, there are not enough building lots, special assessments in new subdivisions discourage buyers, little or no population growth, low wages and too few shopping, dining and entertainment options.

"Tell me what we can do, and I'll help," said Dave Freund , a local home builder and a member of the Hutchinson Planning Commission . "I don't know. I'm just an ordinary contractor who has survived."

Carrying risk

Freund, who is opening up the Kisiwa North and Kisiwa North Second Addition, with single-family, patio and twin homes, thinks one reason for Hutchinson's slump is that developers have to carry too much risk in opening a new subdivision.

Hutchinson requires developers to provide a letter of credit from a bank guaranteeing payment of 35 percent of the cost of infrastructure improvements.

Then the city issues temporary notes to pay for the entire cost of building streets and water and sewer lines. The city will pay for the portion of the new streets that are intersections, and it has a policy of paying 50 percent of the cost of extending water lines into new residential developments. It won't pay any part of sanitary sewer lines, unless a trunk sewer or lifting station for a larger area is required.

Once infrastructure construction is complete, the city sells long-term bonds to pay off the temporary notes and passes an ordinance assessing the improvement district's share of the cost in equal shares to each of the building lots. Those special assessments are used to pay off the bonds over a period of up to 20 years.

And that's the risk for developers -- they are responsible for paying those specials until they can sell the lots to new owners. And there's no deferment or moratorium on special assessments to give the builders a chance to sell the lots before the specials kick in.

Another builder, Jim Strawn , who has built homes in Kisiwa Village and Ashton Estates and recently platted the Oxford Pointe subdivision, said he would "probably disagree" that carrying specials until lots are sold discourages him as a developer.

"You do assume a lot of risk, but that's what you do when you are a developer," Strawn said. "I, as a developer, hope I can convince people that this is a subdivision they want to live in, and I have to sell them on the amenities in my subdivision."

Strawn said there is some value to the public in requiring developers to assume some of the risk for subdivisions.

"I don't know if it needs to be less risky. I wouldn't make it easy. It's high stakes, and you better know what you're doing when you get into the business. If you make it easy, you go back to when we had problems when lots of people were putting in subdivisions."

In the past, he said, there have been times when people who didn't have the assets to withstand a downturn in the housing market were trying to be developers. They ended up losing their building lots when they couldn't make tax and special assessment payments, and the lots were sold at the sheriff's tax sale, Strawn said.

"You don't want every Joe Public being a developer," he added.

Mark Eaton , vice president of Central Bank and Trust , thinks that perhaps city should absorb part of the cost of building infrastructure, but for a different reason than Freund.

New homes, he said, aren't being built because they're too expensive. And the reason they're too expensive, he said, is the special assessments for streets and water and sewer lines. Specials can add $100 a month or more to a new home owner's payment. And for a young couple still paying off student loan debt, a mortgage, property taxes and specials may be too much.

"I think the risk needs to be spread somehow if we are going to keep the cost of homes reasonable," Eaton said. "I don't know where you can do that but across the city at large."

Hutchinson City Manager John Deardoff vigorously disagreed with the suggestion that the city should take more of the risk. Noting the City Council had just approved issuing nearly $5 million in temporary notes and bonds, over half of which was for financing infrastructure in Freund's Kisiwa North, Strawn's Oxford Pointe and Lynn Lackey's Quail Ridge subdivisions, Deardoff said: "We took a risk on three new subdivisions. The developers gave a 35 percent letter of credit to the city, but the tax payers are at risk for 65 percent."

Those who think the city should take on more risk, he said, should talk to Junction City about its risk tolerance for new investments.

Debt service

Anticipating a need for hundreds of new homes as more soldiers came to nearby Fort Riley , Junction City rolled the dice with developers a decade ago. Dave Yearout , the current planning and zoning director, said developers were encouraged to open entire subdivisions at once, rather than in phases. The city issued bonds to finance streets, curbs and gutters and water and sewer lines, but someone in the city also waived a requirement that developers provide a letter of credit guaranteeing payment of 30 percent of the costs.

Yearout said there was a "massive overbuild" and when enough buyers didn't materialize, developers couldn't sell lots and they couldn't make special assessment payments.

"Developers went belly up and left the city holding the bag," Yearout said. "Those bond payments still have to be made."

To pay off the debt, city voters approved a 1 percent increase in the local sales tax. They're still paying it.

"Today, we have no bonding capacity," Yearout said. "We have no ability to borrow money. For five and half years, we've had no new subdivisions platted. But we've got 900 vacant lots."

Over the past two years, he said, 941 properties, almost all vacant lots in new subdivisions, have gone to the annual sheriff's tax sale.

"We're sitting here with a lot of lots with improvements, growing weeds," Yearout said.

It was fear of just such a scenario that prompted Maize to adopt a single-family new home construction incentive in 2010.

City Administrator Richard LaMunyon said that in the midst of the recession, developers couldn't sell building lots in some of the city's new subdivisions and were in danger of going bankrupt. Although the developers had provided a 35 percent letter of credit against the cost of infrastructure construction, the city would have been on the hook for the other 65 percent.

"Nobody wins if they go under," LaMunyon said.

So Maize decided to offer a rebate on the city portion of property taxes, starting at 100 percent in years one through three and declining to 80 percent in years four through six, 40 percent in years seven and eight and 20 percent in years nine and 10.

Maize issued 24 building permits for single family homes in 2010 and 23 in 2011. But once the incentive kicked it, construction picked back up -- 36 permits in 2012, 86 in 2013 and 55 so far this year.

"It's been very successful for us," LaMunyon said.

Before the incentive was put in place, Maize home owners paid more property taxes than the owners of comparable homes across the street in Wichita . But with the incentive, LaMunyon said, they pay less in property tax. The city of Maize's tax rate was 43.27 mills this year. A Maize property owner with a 100 percent rebate on a new single-family house paid 113 mills this year, compared with 125 mills for a person who owned a home in that part of Wichita in the Maize school district.

Maize currently has eight subdivisions in which houses from $120,000 to $1 million and up being built.

Best practice

Hutchinson's policy of issuing bonds to spread out the cost of infrastructure in special assessments over a number of years might be more favorable to developers than some other cities where more houses are being built than in Hutchinson .

Gary Hobbie , director of community and development services for Salina , said about six months ago the city decided to get out of the business of financing infrastructure for new subdivisions. Today, he said, developers must pay up front the entire infrastructure cost. John Braun , assistant director of public works in Hays , said that city requires developers to pay 30 percent of the cost up front. McPherson requires 50 percent up front.

Strawn also is building houses in McPherson . He pays the cost of infrastructure, then rolls that cost into the price of the building lot or the house. The result is that building lots in McPherson cost $30,000 , compared with $15,000 in Hutchinson .

About eight years ago, the City of Pittsburg decided to lure developers to build in the city rather than beyond the city limits by paying 50 percent of the cost of infrastructure. Public Works Director Bill Beasley said the city calculated it would recover its share of the cost in four to six years through property taxes from a fully developed subdivision.

However, the city abandoned that plan three or four years ago, when property values and city revenues dropped during the economic recession. At that point, the city didn't have the money to pay for half the cost of infrastructure, Beasley said.

Pittsburg hasn't had a new subdivision come along recently. But Beasley said if one did the city would probably revert to a long-standing policy of paying for 25 percent of the cost, based on the reasoning that it will cover the intersections, where there is no frontage for developers to build houses.

Strawn said based on his work in the commercial construction sector, he thinks part of the problem in Hutchinson is high property taxes. He knows of three retail stores that have backed away from Hutchinson because of the taxes.

"Between the city, the college, the schools, bond issues, the property taxes are so high," he said.

Hutchinson's total tax rate -- including city, county, school district, junior college, library and recreation commission levies -- is 174 mills, or just over $3,000 a year for a $150,000 home.

Compare that with Salina (135 mills, $2,344 ), Hays (111 mills, $1,918 ), Maize (156 mills, $2,704 ) and Wichita (120 mills, $2,080 ).

Nearly two years ago, the Hutchinson City Council tried to stimulate new home construction and sales by approving a 5-year, 100 percent rebate of the city's portion of the property taxes for single-family homes completed by Dec. 31, 2014 .

As of two weeks ago, however, only six homeowners have taken advantage of the program and only seven others applications are in the pipeline.

Strawn does give the city credit for its single-family construction incentive. "They're trying; they want to see houses built," he said.

However, he said, the city keeps adding to the cost of houses with stricter requirements in new building codes and requirements for thicker foundations for streets.

Changes to building codes, he said, have added $3,000 to $5,000 to the cost of building a new home over the past five years. It's a lot of little things, like an ice and water shield around the perimeter of a house and AFCI and GFCI breakers and more that add up.

The three new subdivisions approved in recent weeks include 108 lots for building single-family homes and eight lots for twin homes. Strawn also has lots available in other subdivisions, and Freund has 22 previously platted lots for patio homes and five for large single-family homes fronting a 6-acre lake in Kisiwa.

That could mean that Hutchinson housing is getting ready to take flight, or it could mean a developer comes crashing down.

"There are lots of streets opening up and the market is not very strong right now," Strawn said.


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