Homeowners stuck with bill for uncollected builder fees

SNOHOMISH — The city of Snohomish wants Ric Suarez to pay $6,000 for a mistake he didn’t make.

The money is for fees the city failed to collect from the developer who built the house Suarez bought five years ago.

The families on either side of him have it even worse: The city wants nearly $20,000 from each of them for what it says are unpaid school-impact and sewer-connection fees.

After a year and a half of back-and-forth with the neighbors plus a criminal investigation into what happened, the city says it’s unable to let them off the hook.

That’s despite evidence that shoddy practices in Snohomish’s building department caused the problems. As the situation festered, the uncollected fees at one point approached a half million dollars.

The city, for years after learning of the unpaid fees, allowed a developer and its affiliates to sell houses without making the situation right. Since then, several homes in the neighborhood were resold, in some cases more than once.

“How is this my fault as a citizen? I did my due diligence,” Suarez said. “We’re being held hostage.”

Suarez remains in limbo. So do the others who decline to make the payments.

Suarez said he gave up on refinancing his house because of the fees. Some of his neighbors put up thousands in cash to make home sales go through.

City leaders are apologetic but say their hands are tied — someone has to pay.

Hundreds of thousands in fees never collected

The Snohomish houses were built five to six years ago by Dynasty Homes LLC of Everett. The area on the western edge of town was developed as the Kendall and Denny plats. Today, it’s a tidy middle-class enclave of cul-de-sacs.

The homes were constructed as the housing market was beginning to tank.

Local governments impose impact fees to make developers pay a fair share of the additional infrastructure required because of their projects. The fees often are used for building roads, schools, utilities and parks. It’s one way to safeguard taxpayers from subsidizing developers.

It was the Snohomish building department’s responsibility to collect the fees before issuing final building permits for the Kendall and Denny homes. That never happened, in direct violation of the city’s own policies.

City officials blame the lapse on a former employee in charge of handing out permits. Yet city records show that the building department grappled for years with when to collect the fees. A department supervisor wrote in 2007 that the former planning director allowed fees to be collected after the builder received permits. She asked the city finance director for clarification on when fees should be paid.

The issue surfaced again in late 2008 when city manager Larry Bauman began taking action against the city’s permit coordinator. Documents show she had a troubled employment history, and Bauman told her in 2005 he was going to fire her for allegedly being hostile and failing to cooperate with coworkers. She remained on the job, but three years later was accused of grabbing a confidential document off her boss’s desk.

While she was on leave, her coworkers discovered that she’d continued to issue building permits without first collecting connection fees, according to a memo dated Oct. 24, 2008.

That led the planning department to dig into the issue. Bauman and other department heads exchanged email.

“It appears we have no process that confirms required fees are collected,” Bauman wrote in a Nov. 20, 2008, message to the city’s then planning director.

He said that regardless of the employee’s individual performance lapses, the city needed to “have a system that involves at least one other person checking (for payment) at or around the time that the fees are due.”

The full scope of the problem was outlined in a Dec. 10, 2008, memo sent to Bauman and the city’s planning and finance directors. The memo, drafted by a building department supervisor, said more than $454,000 was due citywide in outstanding water and sewer connection fees. More than two-thirds of that amount was for the Denny and Kendall development.

Meanwhile, the city fired the permit coordinator. She filed a grievance, and city officials later paid her $20,000 to end the labor dispute. They also agreed to write her a 2009 letter of recommendation, never mentioning her failings or firing.

Concern about the unpaid fees lingered, even as the homes were sold. Records show some in the building department were struggling with how to handle the issue.

The new permit coordinator wrote an email in 2009, saying a loan had closed but school mitigation fees hadn’t been collected.

“I don’t think I can require school (mitigation) from these people, especially after the loan has closed,” the woman wrote.

The city also wrote the developer in 2009 and 2010, saying fees were still due.

All along, the city appeared to have failed to disclose to title companies that the fees were owed. Records show that the city only notified the companies that the properties owed outstanding water and sewer bills, not that the connection fees were still unpaid.

Bauman now says that the city’s finance department was unaware of the unpaid fees because the building department didn’t keep it in the loop. The city has since fixed those communication problems, he said.

Neighbors say they never were alerted and believed the titles were clear when they bought their homes. That changed with the April 11, 2012, letters from city attorney Thom Graafstra, informing them of the thousands of dollars in outstanding sewer or school-impact fees. He gave them two weeks to make arrangements.

“Should we not hear from you or your representative, the City will have to consider exercising its collection remedies,” the letter warned.

Criminal investigation reveals more details

Snohomish leaders also requested a criminal investigation. They alleged that an inspection document may have been forged for one house, allowing the owners to move in without all the proper work being completed.

“The city of Snohomish initially reported several hundred thousand dollars of loss due to the forgery but (the) investigation has only shown one residence that uncovered a possible forgery to the final inspection permit, and in that case the actual forgery occurred to an on-site form that in its original form is lost and has not been recovered,” detective David Fontenot wrote in his report.

The sheriff’s detective, who is assigned to work in Snohomish as part of the city’s contract for police services, determined that a document likely was falsified. His investigation also turned up paperwork that “clearly shows (the city) did not request payment for the known fees to escrow companies as the properties sold or were returned to the bank,” according to the report.

The city “failed to act in a timely manner when it was discovered the fees had not been paid,” he added.

Fontenot wrapped up his investigation in October 2012. He didn’t find enough evidence to prove who forged the form.

“The practices of the City of Snohomish management, the builder and the lack of proper record keeping in this case makes any successful criminal prosecution very unlikely unless other evidence is developed,” he wrote.

He also noted that there was no actual loss to the city with that particular house because the builder paid the fees in full after meeting with police.

Homeowners question why problem wasn’t fixed

When the first letters went out in 2012, the city had tallied up about $240,000 in unpaid fees: eight sets of homeowners owed a combined $106,536 for sewer impacts and another 22 owed $132,638 for school impacts.

Since then, one of the original development partners has made voluntary payments to cut that amount in half, Bauman said.

The city still wants three homeowners to pay about $13,000 each for sewer fees. The city is seeking $78,000, with individual amounts of about $3,000 and $6,000 each, from another 13 homeowners, for school impacts.

The city won’t put a lien on the three houses with unpaid sewer fees, Bauman said, “but we will defer any attempts to collect until those homes are sold in the future.”

Homeowners still question why the city allowed the problem to go unchecked.

Larry and Kathy Coyle live next door to Suarez, on Kendall Court. They moved there from the Sacramento, Calif., area in early 2011. Their home is one of three with outstanding fees of nearly $20,000 for sewer and school impacts.

The Coyles love their house and its proximity to their son’s family in Seattle. But they would have walked away before buying it had the unpaid fees come up during a title search.

“There were multiple opportunities to deal with this correctly and the city didn’t do it,” Larry Coyle said.

Part of the neighbors’ frustration owes to the changing tone and substance of the city’s communications.

The first letter was jarring. A week later, on April 19, 2012, the city backtracked, with an apologetic follow-up letter signed by Mayor Karen Guzak and Bauman.

“We certainly understand what may probably have been your shock and distress in receiving the letter,” it said.

“The tone of the letter was unnecessarily harsh, and it was developed prior to the City’s full understanding of the facts and circumstances regarding each affected property,” it said.

Not mentioned was that the city, by that point, had known about the fees for nearly four years.

The city promised to update the homeowners after the police investigation concluded.

That came on May 6, 2013.

The city said it had pursued restitution from the developer, but didn’t expect to collect anything.

Dynasty Homes still has a valid state contractor’s license, but in 2011 closed its tax account with the state Department of Revenue. That’s why the city is unlikely to recoup anything from the builder, Bauman said.

“Most of these builders create LLCs that are specific to each of these projects,” he said. “Once these projects are finished, the LLCs shut down. Or, if they don’t completely shut down, their assets are almost nil. That’s the problem with going after their assets at this point of the process.”

Bauman said the city needs to look out for all of its residents.

City remains steadfast about collecting money

This fall, Suarez, the Coyles and other neighbors renewed their dialogue with city leaders. Given the problems the city has documented, they hoped to catch a break.

A three-page letter Guzak sent on Oct. 17 dashed those hopes.

“We understand that you as homeowners have done nothing wrong, and we appreciate that the discovery of the unpaid fees is very troubling for many of you,” Guzak wrote. “As a Snohomish homeowner I sympathize with the homeowner’s point of view; however, as you may know, the City has certain statutory responsibilities regarding fees and our agreement with the School District to collect those fees.”

City leaders say they’re doing homeowners a good turn by not putting liens on any of their houses. Still, fees must be paid when the homes are sold or refinanced. The city will disclose the unpaid bills to any title company that asks.

That wasn’t the answer the neighbors were hoping for.

“You failed your fiduciary responsibility when you issued the permits,” Coyle said.

Last month, the neighbors assembled a package of documents detailing their predicament. They sent copies to the state attorney general and state auditor. They want a letter from the city clearing them of all outstanding fees. They’re also asking for a third-party audit of the building department. Additionally, they want Bauman fired.

The state attorney general has turned down the homeowners’ request, saying the issue falls outside his jurisdiction.

Bauman, whose job appears secure, said the building department has made changes to prevent problems from resurfacing.

“We’re making sure that we have at least two sets of eyes that review these permit issues now,” Bauman said.

Otherwise, the city remains steadfast about collecting the money. City leaders have said that by forgiving the outstanding fees, they’d, in effect, be giving the homeowners an illegal gift of public funds.

But as it stands, the homeowners believe the city is giving the developer a public gift — at their expense.

On Kendall Court, Suarez, the Coyles and others wonder why. They certainly never got a discount when they bought their homes.

Noah Haglund: 425-339-3465, nhaglund@heraldnet.com.

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