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Insights

The Morningstar – March 2024 Edition

March 12, 2024

While the development of real property creates numerous benefits for a community—from increased tax revenue to affordable housing to new business ventures—municipalities often are concerned about the possible burden new development may have on existing infrastructure. One way that the North Carolina General Assembly has addressed this concern is by creating “system development fees” which provide a mechanism for local governments to anticipate the inevitable increased strain on water and sewer infrastructure, without unduly burdening new development.

Background

Over the course of the last fifty years, development in North Carolina has boomed due to the rapid increase in population. In response to fears of overtaxed infrastructure resulting from this rapid growth, municipalities developed different schemes to exact funds from developers to defray the anticipated cost of infrastructure upgrades. This led to a hodgepodge of local fees and costs, many of which were not specifically authorized by the General Assembly.

In 2016, the North Carolina Supreme Court decided Quality Built Homes Inc. v. Town of Carthage, in which it struck down a municipality’s imposition of fees that were not expressly authorized by statute, stating “[w]e simply cannot read language into a statute where it does not exist.” In that case, the municipality was charging an “impact fee” to fund future expansion of water and sewer infrastructure. Yet the statute that the town was relying upon only authorized fees for contemporaneous—not future—use. As such, the Court found that the “impact fee” was not authorized by the General Assembly and could not be imposed by the town as a result.

The Statute

In direct response to this case, the General Assembly created what is now the system development fee statute (N.G.G.S. § 162A-200 et seq.). The statute provides municipalities with a mechanism by which to adopt fees for system development, while imposing strict limits on those fees and how they are created, to prevent undue burden on new development.

The statute requires that any system development fee adopted by a municipality be based on a detailed written analysis, prepared by a financial or engineering professional. N.C.G.S§ 162A-205   dictates what types of information that may be used as the basis for the written analysis, the methodology of analysis, the process of adopting the report, how the fee is calculated, and the amount of time that may be used in creating the calculation. If a system development fee is adopted without a written report that conforms to the detailed requirements of this section, it is not lawful.

Prior to adopting the system development fee, a municipality must post the written analysis to the online for review and comment by the community for a period of no less than 45 days. The municipality must solicit and furnish a means to submit written comments, which shall be considered by the preparer of the analysis for possible modifications or revisions to the report. After this review period, the municipality must conduct a public hearing prior to adopting the report and its recommendations, revised by the comments received. After adoption, the report must be published in the budget or fee rate ordinance and must be reviewed and updated every five years.

The system development fee that is adopted by the municipality cannot be in excess of that which the written analysis proposes. While a municipality could adopt a fee at a lower rate, it cannot go higher. While this might seem like it goes without saying, it is an important point—the system development fee that is assessed against new development should be double checked to confirm that the adoption and application complies with all statutory requirements.

There are two important interpretive elements of the statute. The first is N.C.G.S. §162A-215 which states that the statute must be narrowly construed to ensure that system development fees do not unduly burden new development. Additionally, N.C.G.S. §162A-203 states that system development fees may be charged “only in accordance with the conditions and limitations of this Article.” The Court’s ruling in Carthage—that language cannot be read into a statute that does not exist—is explicitly codified in the system development fee statute.

As an additional safeguard against undue burden on new development, the statute requires a credit against the system development fee for a developer’s proportionate share of work on facilities that are outside of the development and which benefit others. This proportionate amount is a direct credit against the system development fee.

The system development fee statute should provide regularity and certainty for development. However, it is a relatively new statute and there is little case law to guide its application. Undoubtedly, there will be questions that arise relating the application of various provisions which will require the guidance of experienced legal counsel.

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