Committee to discuss growth, costs of new Urban Service Area infrastructure

In the Tuesday, January 27th Budget, Finance, and Economic Development Committee meeting, Council will hear a presentation about the Infrastructure Financing Plan from Partners for Economic Solutions. The presentation will cover the potential costs for developing new infrastructure in the parts of the Urban Service Area that were expanded in 2023, how those costs will be paid for, and who will pay them.

Included with the presentation is a market analysis for new development needs in Lexington through 2045, much of which would likely be built in the new expansion areas.

Expansion Infrastructure Costs

In 2023, Council voted to expand the Urban Service Area (USA) in five locations across Fayette County. At the time, one of the main reasons that Division of Planning staff and the Planning Commission recommended against expanding was the cost of building infrastructure.

Since the newly expanded parts of the Urban Service Area are mostly on undeveloped land, they will require brand new infrastructure. This infrastructure must be built to accommodate future development as these areas fill in, even if that development hasn't been proposed yet.

Initial costs for infrastructure in new developments on undeveloped land are typically paid for – in large part – by private developers, and to a lesser extent, local government. Ongoing costs for infrastructure are then typically paid through a mix of private fees, special tax districts, or expanded user fees.

Partners for Economic Solutions says that the total initial capital costs for new infrastructure in these areas will be around $569 million. These infrastructure costs include:

• New Sewer Development — $96 million
• Building new roadways in expansion areas — $190 million
• Connecting and redesigning existing roadways — $51 million
• Complying with Lexington's EPA Consent Decree — $6 million
• Building new community facilities — $19 million
• Building new parks and open space — $43 million

In addition to these one-time capital costs, new facilities built will also have ongoing operating costs.

Paying for infrastructure capital costs

In the 1996 expansion, the most recent one before 2023, the majority of one-time capital infrastructure costs were paid by developers through a controversial exaction program. In the exaction program, developers paid a fee for the parcel they were developing in the expansion area, offsetting the cost to local government. If developers didn't want to pay this fee, they could install the infrastructure themselves and receive an exaction credit for future development in the expansion area.

In their presentation, Partners for Economic Solutions will discuss privilege fees as a potential pathway for paying for new infrastructure costs. In this model, developers installing qualifying infrastructure would be eligible to be reimbursed for their costs by subsequent developers of adjacent land that utilize the newly-built infrastructure. Infrastructure that would qualify for this program would be limited to improvements that serve other properties at a higher cost than they would otherwise require.

In this proposed program, LFUCG would set the rate for reimbursement, adjusted for inflation, and audit the costs of the developer to prevent discrepancies. LFUCG currently has privilege fees in its code of ordinances for application to sanitary sewers.

Paying for operating and maintenance costs

All new infrastructure installed will also have ongoing maintenance costs, whether it is sanitary sewers, roadways, or new community facilities. Partners for Economic Solutions hasn't outlined a proposed structure for paying for operating and maintenance costs for new infrastructure in the expanded urban service areas but says that structures for paying for this could include:

• Private fees through things like HOAs in new developments
• Creating new special tax assessment districts for the expansion areas
• Expanding existing user fees like LexServ for these areas, or countywide

Market Analysis

As part of its work on the Infrastructure Financing Plan, Partners for Economic Solutions conducted a market analysis for Fayette County with the goal of understanding how much the county could grow in the next 20 years. Broadly, the study says that Lexington should plan for dense, walkable development in the new urban service expansion areas, both for cost efficiencies on the new development and because of market demand.

Housing Growth

Their research indicates that Lexington-Fayette County is growing, but slower than in previous years. Figures from the University of Louisville show that Lexington's population may grow to approximately 373,000 by 2045, a 15 percent increase in population. However, the need for new households is growing at a faster rate than population.

Partners for Economic Solutions says that Lexington will likely need an additional 24,000 households by 2045. This is in addition to the existing backlog of housing units in Lexington — approximately 30,000, according to the Kentucky Housing Corporation. The report notes that Lexington has also seen a shift in housing patterns — rising housing prices of single-family homes have pushed many out of homeownership and encouraged new townhouses and rental housing development.

The report recommends that Lexington encourage mixed-use, higher-density development to better serve households at different income levels and life stages. Over the next ten years, the report predicts that the new urban service expansion areas could absorb 5,000 new units of housing.

Commercial Growth

Partners for Economic Solutions suggests that only one of the expansion areas in 2023 would have characteristics that would drive large-scale, regional activity development — Urban Growth Area 5, which includes the Lexington Sporting Club soccer stadium site near the I-75 interchange.

The report indicates that post-pandemic remote work policies have reduced office space demands, and that Lexington will support around 1 to 1.7 million square feet of new office space over the next 20 years. They anticipate that the new urban service areas may fulfill approximately 15 to 20 percent of that new growth. They also indicate that businesses increasingly use office locations as recruiting tools, prioritizing walkable, mixed-use districts with restaurants, services and housing nearby.

Beyond office space, Partners for Economic Solutions says the new expansion areas will support limited industrial and flex uses due to high land costs compared with the rest of the region, and that new commercial retail development will primarily serve nearby residents rather than drawing regional traffic. They also say that new retail growth will lag residential development by at least a decade in most areas.