Arizona Supreme Court Clarifies the Permissible Scope of Real Estate Development Fees Chargeable by Municipalities

In a recent decision entitled Southern Arizona Home Builders Association v. Town of Marana, the Arizona Supreme Court clarified the extent to which the cost of necessary public services provided to new real estate development can be charged by municipalities to those developments.    

The case involved the Town of Marana, Arizona and its imposition of the entire acquisition cost of a water treatment facility, and almost the entire cost of upgrading and expanding the facility, upon future homeowners of a development through the use of a development fee.  The use of such fees is governed by Arizona statute (A.R.S. § 9-463.05), which generally allows a municipality to assess development fees in order to offset costs associated with providing necessary public services to real estate development. The definition of the term “necessary public services” includes the acquisition and operation of wastewater facilities.  The assessment of development fees under the statute is not, however, unrestricted.  

It is no secret that Arizona has seen a staggering amount of real estate development in the last 50 years.  The development fee statute was first enacted in 1982 when municipalities inside and outside of major metropolitan corridors were eager to embrace new development and pass on the cost of providing associated public services and infrastructure to those new developments. The statute required, among other things, that the amount of the development fees must bear a “reasonable relationship” to the burden suffered by the municipality in providing additional necessary public services to the new development.  The statute was substantially rewritten by the Arizona Legislature almost 30 years later, in 2011.  One of the biggest statutory changes enacted at that time was the removal of the “reasonable relationship” standard and the imposition of a new requirement that development fees not be “used to impose on new residents a burden all taxpayers of a municipality should bear equally”. 

In this instance, the Town of Marana took steps, as Arizona law requires, to assure that it had an adequate 100-year water supply before approving any new development   To that end, the Town first acquired a wastewater treatment facility in 2012, and a number of years later initiated steps to upgrade and expand the facility.  The Town then sought to recapture the acquisition cost of the facility and most of the upgrade and expansion costs by charging a development fee to future homeowners who would benefit from the facility. 

A lawsuit was filed by the Southern Arizona Home Builders Association in 2018 challenging the Town’s right under Arizona law to impose the development fees solely upon future homeowners.  After working its way through the trial court and the Arizona Court of Appeals, the case landed at the Arizona Supreme Court. The Court ruled that the Town violated A.R.S. § 9-463.05 (as amended) by making future development shoulder virtually all of the cost of acquiring, upgrading and improving the new water treatment facility.  The Supreme Court’s decision was largely based on the statute’s mandate that development fees cannot be used to impose solely on new residents the cost of necessary public services from which existing residents also benefit.  The Court made clear in its ruling that it was not challenging the Town’s decision to acquire and improve the facility, nor was it challenging the costs involved.  Rather, in recognizing that the upgraded and improved wastewater treatment facility clearly provided a necessary public service to the entire Town that benefitted both new and existing development, the Court concluded that the Town could not force new residents to bear a disproportionate share of the costs to provide that service. 

Development fees are valid in Arizona only if the municipality complies with the requirements of A.R.S. § 9-463.05 in its implementation of those fees.  The Marana case makes clear that, while municipalities had a freer reign in imposing development fees prior to 2011, the State Legislature’s virtual rewrite of the statute in 2011 put some constraints on how and when those fees can be assessed to residents.