LELAND — Leland is being named in a class action lawsuit for charging water and sewer expansion fees that may be illegal.
The class action suit, filed last month, alleges the town has unlawfully collected what are known as “impact fees” in recent years; these fees have been used by utility providers to charge customers for predicted future infrastructure costs. These fees have padded the town’s utility fund by millions, records show.
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Though just one builder has signed on to the suit, it’s possible more could join. In a statement provided through its town attorney, Leland empathetically denies all allegations.
Impact fees
Municipalities and water providers commonly collect fees from individuals and businesses that wish to connect to new or existing water and sewer lines.
“Tap on fees,” or fees charged to connect to a town’s infrastructure, are different from fees Leland is being sued over.
Also referred to as “impact” or “capacity” fees, “system development fees” are now regulated by both legal precedent and state law. Compared to impact fees that were commonly charged before, system development fees have been reigned in by statue, and require extensive analysis before being collected by a utility provider.
The plaintiff, Plantation Building Corp., alleges Leland has illegally collected impact fees for at least 19 of its new properties over the last three years.
The new, regulated fees must represent the actual projected cost, based on a professional analysis, to fund capital improvements to expanded water and sewer lines to meet the new customer’s needs. In addition, system development fees can be calculated to include the cost-estimate borne by existing facilities to serve the new development.
That wasn’t always the case: prior to 2016, these fees were often calculated without professional analysis, estimated based on the future cost of development in the area, charging an amount determined by the town or utility provider. In other words, impact fees could be used as a revenue stream to fund future utility development and weren’t restricted to the direct, calculated costs of connecting new customers to the new utility services.
In 2016, the North Carolina Supreme Court ruled impact fees that estimated future service costs were unlawful. The court ruled in favor of a builder, finding that towns do not have the power to impose impact fees for future services.
Leland, one of many
“When the court ruled the way it did in 2016, I think for everybody it was a wakeup call,” Hunter Bryson, the attorney who filed the case against Leland, said.
Bryson, an attorney for Whitfield, Bryson & Mason LLP, said his firm has filed nine similar suits against municipalities since last year.
Following the court’s 2016 decision, the General Assembly both legalized and clarified what towns could charge. Under House Bill 436, signed into law Oct. 2017, system development fees allow towns to recoup capital improvement costs to service new development.
The law does not retroactively authorize municipalities to charge impact fees. With a three-year statute of limitations, unlawful fees charged after Oct. 2014 are technically still fair game for builders who want to recoup their losses.
After the court ruled towns didn’t have the authority to charge impact fees, Bryson said Leland “panicked.” On January 2017, months after the law passed, Leland acknowledged the court’s decision that ruled impact fees illegal.
Instead, the town introduced “capacity fees,” a move Bryson describes as a shielded attempt to continue collecting the illegal fees.
“They essentially renamed them from ‘impact fees’ to ‘capacity fees’ in an attempt to legalize them,” Bryson said.
These fees were introduced to cover for the loss of impact fees while preventing water and sewer rates from increasing, according to the town’s January resolution.
Collected as a precondition of approving a building permit, Bryson said Leland pocketed these fees before any development had taken place. “There were other ways in which the town could have legally come up with the money that it needed that the impact fees provided,” Bryson said.
Brian Edes, Leland’s new town attorney, appointed early last month, said the town is presently assessing Plantation Building Corp.’s allegations.
“Nevertheless, the Town of Leland is confident that it is in full compliance with N.C. House Bill 436,” Edes wrote in an email. “The Town emphatically denies all allegations to the contrary.”
Since the initial complaint filing in September, Leland has not yet legally responded. Edes said as Leland prepares to present its case, it stands by the fees it has charged in recent years.
“Moreover, the Town is confident that the fees it has charged are appropriate; all fees relevant to this suit were calculated to cover the costs and expenses associated with adequately and safely providing water and sewer services to Town residents,” Edes said. “The Town looks forward to proving these matters in this case.”
Source of revenue
Impact fees have been a major revenue source for Leland.
Between 2014 and 2015, Leland collected over $1 million in impact fees, according to the town’s financial audit. In 2015 and 2016, the town collected nearly $1.3 million in impact fees.
Impact fees are noticeably missing from Leland’s 2016-2017 financial audit. However, they were budgeted to account for nearly a third of the revenues feeding the town’s utility fund.
These fees, rather than being based on actual costs, are “arbitrary” and “capricious,” the suit alleges. Plantation Building Corp. – whose founder, Dave Spetrino, also happens to be the president of Wilmington-Cape Fear Home Builders Association – is seeking a return of all fees, plus six percent interest.
Because the suit is a class action, Plantation Building Corp. will represent any future party that may choose to join.
Since Whitfield, Bryson & Mason LLP’s first filing against Holly Springs last year, Bryson said his firm brought forth many more cases.
“Since then we’ve learned more about towns across the state that have charged these fees and learned more about the conduct that has been going on.”
Send tips and comments to Johanna Ferebee at johanna@localvoicemedia.com
