Homebuilders are rejoicing while affordable housing advocates are rethinking their fund-raising strategies as a Superior Court judge ruled last week that an inclusionary housing fee imposed on builders in the town of Barnstable is illegal, and the money collected must be repaid.

The lawsuit, which pitted a group of homebuilders and homeowners against Barnstable, arose out of the town’s decision in 1999 to institute the housing fee as part of an effort to gather more money to build affordable housing. The fee required anyone building a structure totaling more than $100,000 to pay an additional 1 percent of total construction costs into an affordable housing fund.

Additionally, developers that wanted to subdivide land consisting of fewer than 10 acres were required to pay a fee of $500 per lot created.

Developers balked at the proposal, however, calling the fee an illegal tax. A Barnstable Superior Court judge agreed.

Centerville attorney Paul Revere III, one of the attorneys representing the plaintiffs in the case, argued that only a select few were being taxed when the benefits derived from that tax were widespread.

“The obligation to be sure that enough affordable housing is provided should not be placed on such a small portion of the community,” he said. “It should be the responsibility of the whole community.”

In papers filed with the court, Revere, along with co-counsel Gerald S. Garnick and Lois M. Farmer of Hyannis, outlined reasons why the plaintiffs felt the fee was an illegal tax.

A fee, he wrote, is distinguished from a tax by three common traits: It is charged in exchange for a service that benefits the person paying the fee; the party paying it has the choice not to utilize the service and avoid the charge; and a fee is collected to compensate the entity providing the service, not to raise revenue.

The party paying the fee is not getting a service, Revere argued. Furthermore, because there is no service, there is no need to compensate the government for the service, and the payee has no choice but to pay the fee, he said.

Because the fee fails those tests, Revere said, it is actually a tax, and the tax cannot be imposed on a specific group like homebuilders unless the town gains approval from the Legislature.

“Fees are legitimate to the extent that the services for which they are imposed are sufficiently particularized as to justify distribution of the costs among a limited group or beneficiaries of the services, rather than the general public,” wrote Judge R. Malcom Graham in his decision. “The benefits [of] affordable housing are not limited to home builders.

“The charges are not intended, and do not operate, to confer a private benefit on the payers of the charge. Rather, the charges are intended to confer a public benefit to the town of Barnstable by providing the community with the funding to meet its statutorily imposed affordable housing obligations,” he continued. “This is a public obligation and a public interest which the town of Barnstable must bear, rather than the limited population of those seeking to subdivide real estate and construct new residential units.”

In conclusion, Graham ruled the fee an illegal tax under the provision of the state constitution, and ordered the town to pay the fees back to the developers with interest.

“I’m pleased with the ruling,” said Ed Mogan, a Centerville builder and president of the Home Builders Association of Massachusetts. “I only had one house that was affected, and that had a $6,000 fee.”

Mogan added that many of the homes affected by the fees were “trophy homes” built by out-of-state residents. “Most of the people don’t live here anyway, so they’re not using the services but they’re paying the taxes for the town.”

Revere said he understood the town was looking for a way to raise money for affordable housing, and added that since the Community Preservation Act has become law, there is an approved way of raising funds by having residents vote to tax themselves.

“This ruling will ensure that cities and towns will use the Community Preservation Act to raise money, rather than circumventing the process, by bringing it to a vote,” he said. “The one thing that bothered me is that when you placed these taxes on the new homes, you were taxing the non-voters. The CPA taxes all homes equally.

“Rather than spending time and money on litigation [associated with the building fees], the towns should focus on [the CPA],” he said.

‘Red Alert’
Barnstable Town Attorney Robert D. Smith said town officials have not yet decided whether they would appeal the case. “We’re looking at the issue carefully, and it’s an important issue,” he said. “We were using a revenue source for the specific purpose of addressing an issue which has reached crisis proportions in the commonwealth.

“We were using a locally fashioned remedy that appeared to be available to us.”

Smith said the town could explore using the CPA to continue to raise funds for affordable housing, but added that might be tricky.

“We already have the land bank, and there’s a certain amount of complexity in coping with both. But it might be the only way to go,” he said.

Smith said that the town has been setting aside the approximately $500,000 in fees in an account, so Barnstable will not have to scramble to cover the repayment order issued by Graham. “We’re not reeling from the financial impact of this,” he said.

If the town decides to appeal the court ruling, Smith said it would not delay refunding the fees collected thus far. “We’ll have [a plan] done within the next two or three days,” he said in an interview late last week, adding he was uncertain when the actual disbursement would take place.

“We didn’t win the case, but we’re trying our best to solve the problem of a lack of affordable housing in town,” Smith said.

Though the case applies solely to Barnstable’s fees, housing advocates statewide are wondering what the effects of the ruling could have on their communities.

“One jurisdiction doesn’t apply statewide, but this sends out an alert for other communities,” said Roger Blood, chairman of the Brookline Housing Advisory Board, which has worked with developers to create affordable housing in new projects or collect funds from developers in lieu of the units.

“We’ve worked on quite a few deals where there has either been cash contributions or direct [affordable housing] production on site,” Blood said. “Towns like ours have been advised to confirm that our bylaws differ from those of Barnstable so that would insulate us [from that ruling], and we are researching that right now.

“The decision didn’t provide any open-and-shut assurances,” he continued. “But it’s a red alert that we have to be on solid ground with what we’re doing. The last thing we want is to have everything undone.”

“We know we’re all going to have to pay for affordable housing somewhere,” Mogan acknowledged. “We just think it should be taxed across a broader spectrum. Everyone down here is complaining there’s no help available to work in the stores, and it’s because those people cannot afford to live here.”

“We think the law is clear on this issue … We had a very simple case,” Revere said. “We look forward to having our fees returned to us.”

The plaintiffs originally filed their lawsuit with the Supreme Judicial Court because they felt the issue was a statewide one, Revere said. The SJC however, ultimately sent the case to Barnstable Superior Court for a decision.