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Tool 5: Covering/Recovering Costs

Tool 5: Covering and Recovering Costs

Every regulation carries a cost. Most municipalities have some latitude in charging fees for services and programs. Some basic principles are:

  • As a rule, fees should cover not only the direct, but also the indirect – legal, administrative, etc. – costs of the service or activity;
  • Fees, even if legitimate from the standpoint of covering costs, should not be set so high that they are likely to trigger negative consequences such as abandonment; and
  • Where the city must go “out of pocket” it should have effective means of recovering the cost.

 

In many states, state law determines what cost recovery options are available to cities, and in some, what fees can be charged. In other states cities have great flexibility. Fees must be proportionate to the cost of providing the service or carrying out the activity, and not an indirect means of getting more money into the city’s general fund. In that case it may be considered a tax and is vulnerable to legal challenge. Some fees are of general applicability, such as licensing fees, while others apply only where the city takes a particular action, such as abating a nuisance.

 

Licensing fees

Licensing fees vary widely. The city of Brooklyn Center charges a stiff licensing fee of $400 for the initial license or renewal of a license with a change in ownership, and $300 for license renewals without a change of ownership. This is a high burden on landlords in a city with relatively modest rent levels. A different approach designed to motivate good behavior has been adopted by Geneva, New York. They charge no licensing fee, and the initial inspection and one follow-up inspection are free. If, however, the property is not fully in compliance after the first follow-up, the city charges $100 for each subsequent inspection.

 

Rental conversion fee

Minnesota municipalities charge a rental conversion fee, applied when a property is converted from owner-occupancy to rental use. The fee covers the cost of registration, the cost of an initial inspection, and implicitly builds in what is assumed to be the disproportionate cost of monitoring and providing services to a rental unit compared to an owner-occupied unit. Minneapolis’ fee is $1000, while that of the city of New Hope, Minnesota is $750.  

 

Any municipality imposing registration, licensing or similar fees on rental properties should study the amount of the fee to determine whether it can reasonably be imposed on the owner without negative consequences.

 

Disproportionate impact fee

State law in Utah permits municipalities to impose a disproportionate impact fee on rental properties based on the extent to which they impose disproportionate service burdens on the municipality. Each city imposing the fee must also have a “good landlord program.” If a landlord participates in the good landlord program, they receive a substantial discount on the fee.

 

The disproportionate impact fee is explicitly authorized by Utah law, but many cities have some flexibility to enact similar ordinances to address compelling local needs even without state enabling statutes. In states with broad home rule laws, such as New York, Ohio or California, similar ordinances clearly grounded in legitimate public welfare concerns and carefully crafted to ensure that the fee is justified by actual costs, are likely to pass muster.

 

Landlord security deposit

Ridgefield, New Jersey adopted an ordinance requiring landlords to post “security deposits” with the municipality. The owner of any rental building of four or more units must deposit money into a security fund held by the municipality. The municipality can use the money in the security fund to eliminate or alleviate an emergency condition where the owner has received notice of the emergency and failed to commence work in 24 hours, or if work commenced, failed to complete it in 72 hours.


Cities may want to consider making such an ordinance apply only to landlords with a pattern of failing to respond in timely fashion to health and safety emergencies, along the lines of the “bad apple” approach.

 

Nuisance abatement

Nuisance abatement is where an owner has failed to correct a violation, and the city enters onto the property in order to do so. Nuisance abatement actions can range from cutting grass on a vacant lot to demolishing, or even restoring, an unsound building. While in theory the cost of nuisance abatement should be recoverable from the owner, this often fails to happen.

 

Cost recovery for nuisance abatement is usually defined by state law. Ideally, a state law should provide for the following:

  • The city can place a super-priority lien on the property, which goes ahead of other liens and can be foreclosed by the municipality independently of whether or not the property is tax delinquent; and
  • The city can also get a judgment against the owner, and place a lien against another asset of the owner. Since many properties are put in the name of a corporation or LLC, the city should have the power to pierce corporate veils.

 

If state law does not permit effective cost recovery, efforts should be made to get amendments to the law.

 

 

Go to Tool 6: Good Landlord Incentives