Contending with a still-sluggish economy, local governments in Western Riverside County have renewed measures to energize the construction industry though the reduction of development impact fees.

By knocking down the financial barriers to growth, they are enticing builders to return to their cities.

“It has had a stimulative effect, without a doubt,” said Scott Mann, councilman of Menifee, which has reduced its development impact fees by 65 percent.

In May, the cities of Menifee and Perris extended their permit fee reductions for another year, starting July 1, after seeing positive results since first lowering the costs in 2009.

To demonstrate the growth, Mann said his city had projected earning $650,000 in building and planning revenue in fiscal year 2009-2010, but wound up capturing $1.4 million.

“Our permit activity has exploded,” Mann said. What’s more, sales tax revenue for the first quarter of 2010 increased 23 percent over the previous year, Mann said. Menifee incorporated in 2008.

In the city of Perris, which reduced its building fees by 50 percent, residential building permits have increased fivefold since the start of 2009. “The market is far from back” to good health, said Perris City Councilman Mark Yarbrough, explaining why the fee cut was renewed for another year.

But a big sign that the incentives are working is a 7.2 million-square-feet industrial and commercial development that was just approved by the City Council. “That’s huge, a project of that magnitude,” Yarbrough said.

At the bottom of the recession, Riverside County was second only to Detroit in having the highest unemployment rate in the country.

The once thriving construction industry hobbled to a near standstill. The median home price in Western Riverside County plunged from a high of $426,000 in 2007 to $200,000 in 2009. Homes foreclosures tumbled across one housing tract after another.

It was a code red situation, and local government leaders banded together to figure out how to jolt the economy out of its death spiral. They created the Riverside Economic Development RED TEAM to identify ways to minimize the downturn and transition to recovery.

“We were trying to save the life of the patient,” said Mark Knorringa, chief executive officer of the Riverside County chapter of the Building Industry Association of Southern California, a trade organization representing builders and home buyers. “It was an unprecedented situation.”

The RED TEAM affirmed recommendations of a local economist, John Husing, to lower the financial impediments to home construction and commercial building projects by lowering development impact fees and other permit costs. Builders simply could not afford to pay the pre-recession permit fees, which ran an average of $18,000, now that home values had dropped by half.

Other cities in the region, including Beaumont, Banning and Corona, have also lowered or deferred the increase of building permit fees. And regionally, the Western Riverside Council of Governments reduced a development fee that pays for big-ticket projects such as highway construction.

In June, the Beaumont City Council renewed a 30 percent reduction in building permit fees that it inaugurated last year. In the first quarter of 2010, Beaumont issued the most residential building permits of any city in the county.

However, the city scrapped its plan to raise the fees 10 percent a year so that they were back to normal by 2012. “The recovery is tepid,” so the extra incentive to build is still necessary, said Dave Dillon, the city’s economic development director. Beaumont, population 34,000, is the fastest growing city in Riverside County.

Some cities are providing other incentives to build, or buy a home. Mann said Menifee is awarding a 50 percent property tax rebate to home buyers in their first two years of ownership. If the city earns $700 in annual property taxes from a home, for example, it will return $350 to the homeowner.

Some city officials worry that lowering permit fee revenue is a gamble, that it might hinder their ability to build sewers, roads and other infrastructure required for new neighborhoods. But others say the gains outweigh the losses, at least in these times.  If permit fees unaffordable, builders won’t build, and that results in no municipal revenues, job creation or economic activity.

Dillon in Beaumont said that his city, for one, is not concerned about losing income from the permits, because it has had a program in place since 1993 that requires large home builders to pay for infrastructure improvements up front with bond financing.

Knorringa said it’s not just the construction firms and home developers that benefit from such incentive programs-there is a ripple effect. “It’s a psychological boost for the community,” Knorringa said. “When people move in (to new homes), they spend money in town.”

The economic recovery is further encouraged by water districts and school districts across Western Riverside County who have lowered their permit fees by as much as 58 percent, according to Knorringa’s group.

These enticements to build and spur growth are critical. “This isn’t to build homes so much as create jobs,” Knorringa said. “We’re just trying to get some people back to work and turn this thing around.”

The number of building permits issued across Western Riverside County dropped from a high of 22,000 in 2005 to a low of 2,700 in 2009, Knorringa said. While many cities have room to keep growing and depend on that growth for economic vitality, Knorringa said the rate of growth will have to adjust downward in the years to come.

“Growth in the next ten years will be much less than in the previous decade,” Knorringa said. Success will be if “the region climbs up to 7,000 to 8,000 permits a year.”  

Mann sees a trifecta of positive signs: home values are stabilizing, foreclosures are decreasing and home sales are increasing.

His fledgling city could swell from the current population of 68,000 to as much as 225,000. “We have a lot of dirt,” Mann said, referring to Menifee’s vacant expanses. “Forty-five percent of the city is undeveloped.”