In the following section EPA develops estimates of the distribution of this acreage by type of development and by project size. EPA also estimates the amount of acreage potentially excluded from coverage under the site size exclusions specified for Option 1 and Option 2 ( i. e. , below one and below 5 acres, respectively) . With the resulting estimates of acreage distributed by project type and size class,

EPA can then apply the appropriate per acre engineering costs to obtain estimates of national costs.

4.4.2 Distribution of Acreage by Project Type To allocate the NRI acreage, EPA has estimated the distribution of acres developed by type of development in the following way. In the first step, EPA multiplied the number of building permits issued annually by estimates of the average site size. Thus for single family residential construction,

EPA multiplied the number of new single family homes authorized by building permit by the average lot size for new single family construction. Estimates for other types of construction are based on extrapolations from the Census permit data and EPA estimates of average project size. In the second step, EPA adjusts the estimates of acres converted to reconcile any differences between the total number of acres accounted for using this approach and the total acres developed estimated by the NRI. Finally,

4 46 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 EPA allocates the total by type of construction, site size, and region and adjusts each regional value to an integer to ensure that only whole sites are considered.

Table 4 10. Acres Converted from Undeveloped to Developed State a ( 1992 1997)

Type of land Acres Converted to Development 1992 1997 ( 000) annual average Percent contribution by type of land Cropland 574.8 25.6%

Conservation Reserve Program land 1.5 0.1%

Pastureland 391.2 17.4%

Rangeland 245.9 11.0%

Forest land 939 41.9%

Other rural land 89.1 4.0%

Water areas and federal land 1.8 0.1%

Total 2,243.4 100.0%

a NRI defines developed land as a combination of the following land cover/ use categories large urban and built up areas , small built up areas , and rural transportation land . These are defined as follows:   Large urban and built up areas . A land cover/ use category composed of developed tracts of at least 10 acres   meeting the definition of urban and built up areas. b   Small built up areas. A land cover/ use category consisting of developed land units of 0.25 to 10 acres, which meet the definition of urban and built up areas. b   Rural transportation land. A land cover/ use category which consists of all highways, roads, railroads and associated right of ways outside urban and built up areas; also includes private roads to farmsteads or ranch headquarters, logging roads, and other private roads ( field lanes are not included) . b Urban and built up areas are in turn defined as:   Urban and built up areas. A land cover/ use category consisting of residential, industrial, commercial, and institutional land; construction sites; public administrative sites; railroad yards; cemeteries; airports; golf courses; sanitary landfills; sewage treatment plants; water control structures and spillways; other land used for such purposes; small parks ( less than 10 acres) within urban and built up areas; and highways, railroads , and other transportation facilities if they are surrounded by urban areas. Also included are tracts of less than 10 acres that do not meet the above definition but are completely surrounded by Urban and built up land. Two size categories are recognized in the NRI: areas of 0.25 acre to 10 acres, and areas of at least 10 acres.

Source: USDA, 2000.

Single family residential Census data indicate that in recent years the number of new single family housing units authorized has averaged just over 1.0 million units per year ( see Table 4 11) . As seen in Table 4 12, the average lot size for new single family housing units is 13,553 square feet, or 0.31 acres ( 1 acre = 43,560 4 47 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 square feet) . Using the average lot size, however, would underestimate the total acreage converted for single family residential projects because this acreage does not include common areas of developments that are not counted as part of the owner   s lot   streets, sidewalks, parking areas, storm water management structures, and open spaces.

To account for this, EPA examined data obtained from a survey of municipalities conducted in support of the Phase II NPDES storm water rule ( EPA, 1999) . This survey identified 14 communities that consistently collected project type and size data as part of their construction permitting programs. 26 EPA   s review of permitting data from these communities covered 855 single family developments encompassing 18,134 housing units. The combined area of these developments was 11,460 acres. This means that each housing unit accounted for 0.63 acres ( 11,460 acres ÷ 18,134 units = = 0.63 acres per unit) . This estimate, essentially double the average lot size, appears to more than account for the common areas and undeveloped areas in a typical single family residential development. For this reason,

EPA averaged the Census estimate of the national average lot size ( 0.31 acres) and the Phase II NPDES storm water estimate of 0.63 acres per unit to arrive at an estimate of 0.47 acres per unit. This number was multiplied by the average number of single family housing units authorized by building permit, 1.04 million, to arrive at an estimate of 490,231 acres ( see Table 4 15) .

Table 4 11. New Single Family and Multifamily Housing Units Authorized, 1995 1997 Year All Housing Units Single Family Housing Units Multifamily Housing Units 1995 1,332,549 997,268 335,281 1996 1,425,616 1,069,472 356,144 1997 1,441,136 1,062,396 378,740 1995 1997 avg 1,399,767 1,043,045 356,722 Source: Census 2000b. Series C40 New Privately Owned Housing Units Authorized.

26 The communities were: Austin, TX; Baltimore County, MD; Cary, NC; Ft. Collins, CO; Lacey, WA; Loudoun County, VA; New Britain, CT; Olympia, WA; Prince George   s County, MD; Raleigh, NC; South Bend, IN; Tallahassee, FL; Tuscon, AZ; and Waukesha, WI.

4 48 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 4 12. Average and Median Lot Size for New Single Family Housing Units Sold, 1995 1997 Year Average Lot Size ( Square Feet) Median Lot Size ( Square Feet)

1995 13,290 9,000 1996 13,705 9,100 1997 13,665 9,375 1995 1997 avg 13,553 9,158 Source: Census 2000a. Series C25 Characteristics of New Housing:

Multifamily Residential For residential construction other than single family housing, EPA divided the average number of units authorized over 1995 1997 ( 356,722, from Table 4 11) by the average number of units per new multifamily building. The average number of units per building was obtained by examining the distribution of units by unit size class in Census data ( U. S. Census Bureau, 2000b) . This report shows the number of units by building size class ( 2 to 4 units, 5 to 9 units, 10 to 19 units, 20 or more units) . 27 EPA estimated the number of buildings in each size class ( using data for 1999 and 2000) by dividing the number of units in each class by the average number of units. The total number of units were then divided into the estimated number of buildings to arrive at the average number of units across all building size classes. When this was done, the average number of units was estimated to be 10.8.

EPA next examined data on the average site size for multifamily residential developments. The Center for Watershed Protection reports estimates from one survey in which the footprint for multifamily buildings occupied an average of 15.6 percent of the total site ( CWP, 2001) . EPA assumed that the average sized multifamily building ( 10.8 units) would have two floors and that each unit occupies the national average of 1,095 square feet ( NAHB, 2002) . The total square footage accounted for by living space is thus 11,826 square feet. Multiplying by a factor of 1.2 to account for common areas and other non living space ( utility rooms, hallways, stairways) , and dividing by 2 to reflect the assumption of a 2

27 The average number of units was derived using data for 1999 and 2000, since data for prior years was not available at this level of building size detail.

4 49 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 story structure, EPA obtained a typical building footprint of 7,096 square feet ( 11,826 x 1.2 ÷ 2 = = 7,096) .

Combining this with the CWP estimate of the building footprint share of total site size ( 15.6 percent) , the average site size was estimated to be 42,485 square feet ( 7,096 ÷ 0.156 = = 45,487) , or just over one acre ( 1.04 acres) .

EPA compared the average site size obtained using this approach with data from the 14 community study referenced above. That study   s review of permitting data identified 286 multifamily developments covering a total of 3,476 acres. The average site size, 12.1 acres, is considerably higher than that obtained above. EPA has no indication that the permits reviewed in these communities are for projects of a larger than average size. For purposes of this analysis, EPA has taken the midpoint of the estimates, 6.5 acres, as the average size of multifamily projects. This number was multiplied by the average number of multifamily housing developments authorized by building permit, 35,672, to arrive at an estimate of 231,868 acres ( see Table 4 15) .

Nonresidential construction EPA lacked current data on the number of nonresidential construction and development projects authorized annually because the Census Bureau ceased collecting data on the number of permits issued for such projects in 1995. EPA therefore used regression analysis to forecast the number of nonresidential building permits issued in 1997, based on the historical relationship between residential and nonresidential construction activity ( see Section 4.5.3) . Using this approach, EPA estimates that a total of 426,024 nonresidential permits were issued in 1997. These represent a variety of project types,

including commercial and industrial, institutional, recreational, as well as nonresidential, nonbuilding projects such as parks and road and highway projects.

EPA first combined a number of nonresidential project types into a larger   commercial   category, which included hotels and motels, retail and office projects, and religious, public works, and educational projects. 28 EPA   s reasoning for including the latter categories under the commercial category 28 The commercial category included: hotels/ motels, amusement, religious, parking garages, service stations, hospitals, offices, public works, educational, stores, other nonresidential buildings.

4 50 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 is based on engineering judgment that storm water management practices would be similar across each project type. The total estimated number of commercial permits in 1997 was 254,566 ( 59.7 percent of the nonresidential total) . EPA retained the industrial category, which totaled 12,140 permits ( 2.8 percent) , separately. Storm water management practices for such sites generally differ from those for commercial or residential sites. The residual, 159,318 permits ( 37.4 percent) , are nonbuilding,

nonresidential projects that include parks, bridges, roads, and highways. EPA accounts for these projects in the steps described further below.

For the commercial and industrial categories, EPA reviewed the project size data collected from the 14 community study referenced earlier ( EPA, 1999) . This study identified 817 commercial sites occupying 5,514 acres and 115 industrial sites occupying 689 acres. The average site size is 6.75 and 5.99 acres, respectively.

EPA also reviewed estimates from CWP ( 2001) on the average percent of commercial and industrial sites taken up by the building footprint. These percentages, 19.1 and 19.6 respectively, were multiplied across the model project site sizes of 1, 3, 7.5, 25, 70, and 200 acres to estimate the size of building on each site, assuming single story buildings in each case. These estimates are shown in Table 4 13.

Table 4 13. Average Building Square Footage Project Size ( Acres) Commercial Industrial 1 8,320 8,555 3 24,960 25,666 7.5 62,400 64,164 25 207,999 213,880 70 582,397 598,863 200 1,663,992 1,711,037 Estimates were obtained by multiplying the site size in square feet by the percentage of the site estimated to be occupied by the building footprint, based on data from CWP ( 2001) . Source: EPA estimates.

4 51 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 As seen in the table, the average building size corresponding to the 6 to 7 acre sites estimated from the 14 community study are in the 60,000 square feet range. EPA next examined R. S. Means ( 2000) , which provides cost data for   typical   commercial and industrial buildings. . As part of the cost data, Means identifies the typical range of building sizes based on a database of actual projects. Table 4

13 shows the typical size and size range for a variety of building types that would fall into either the commercial or industrial categories. While some of the building types correspond with the estimated average of 60,000 square feet, these appear high for other categories, such as low rise office and supermarkets, warehouses, and elementary schools. EPA believes generally that there are more small projects than large ones. As a result, EPA inferred that this approach would suggest an average building size of 25,000 square feet, which implies an average site size of 3 acres, based on Table 4 14.

Table 4 14. Typical Building Sizes and Size Ranges by Type of Building Building Category/ Type Typical Size ( Gross Square Feet) Typical Range ( Gross Square Feet)

Low High Commercial  Supermarkets 20,000 12,000 30,000 Commercial  Department Store 90,000 44,000 122,000 Commercial  Low Rise Office 8,600 4,700 19,000 Commercial  Mid Rise Office 52,000 31,300 83,100 Commercial  Elementary a 41,000 24,500 55,000 Industrial  Warehouse 25,000 8,000 72,000 a For purposes of this analysis EPA combines a number of building types, including educational, under the commercial category. Source: R. S. Means ( 2000) .

To reconcile the estimates obtained from the two approaches, EPA has taken the midpoint of the estimates. For commercial development, EPA assumes an average site size of 4.87 acres ( the average of 6.75 and 3.0 acres) and for industrial development EPA assumes an average site size of 4.50 acres ( the average of 5.99 and 3.0 acres) .

The resulting average project sizes were then multiplied by the estimated number of commercial and industrial permits to obtain an estimate of the total acreage developed for these project categories.

4 52   Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 4 15 shows the results of this   bottom up   approach to estimating the number of acres of land developed. The overall estimate of the amount of land developed is 2.01 million acres per year.

Residential single family development accounts for 24.4 percent of the total, multifamily development for 11.5 percent of the total, commercial for 61.4 percent, and industrial for 2.7 percent.

Table 4 15. National Estimates of Land Area Developed Per Year, Based on Building Permit Data Type of Construction Permits Average Site Size a Acres Disturbed Number Pct. of Total Number Pct. of total Residential Single family 1,043,045 77.5% 0.47 490,231 24.4%

Multifamily 35,672 2.7% 6.5 231,868 11.5%

Nonresidential Commercial b 254,566 18.9% 4.9 1,234,645 61.4%

Industrial 12,140 0.9% 4.5 54,630 2.7%

Total 1,345,423 100.0% 2,011,374 100.0%

a For single family residential, this is the average of the average lot size for new construction in 1999 ( Census 1999) and the average obtained in EPA ( 1999) . For all other categories, the site sizes are EPA assumptions based on representative project profiles contained in R. S. Means ( 2000) and the 14 community survey conducted in support of the Phase II NPDES storm water rule ( EPA 1999) . See also Tables 4 7 and 4 8. b A number of project types were grouped together to form the   commercial   category, , including: hotels/ motels, amusement, religious, parking garages, service stations, hospitals, offices, public works, educational, stores, other nonresidential buildings.

The estimate of total acreage developed, 2.01 million acres, can be compared with the estimate provided by the NRI. From Table 4 10, NRI estimates that a total of 2.24 million acres are converted from undeveloped to developed status each year. As noted above, some acreage would not be covered by the proposed rule or site size limitations due to waivers. The estimated acreage subject to the proposed rule 2.18 million acres. 29 EPA considers the estimate of 2.01 million acres ( Table 4 15) to be close to the estimates obtained from NRI. Areas not accounted for in EPA   s estimates include those converted as a result of 29 This is technically the acreage covered under Option 1, which affects sites of one acre or more in size. Estimates of the acreage covered under Option 2, which affects sites of five acres or more, are made in Section 4.4.4.

4 53 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 road, highway, bridge, park, monument, and other nonbuilding construction projects. 30 EPA has not developed engineering costs applicable to these types of projects, but assumes that the builders and developers of these areas would face compliance costs, i. e. , the acres should not be excluded from the analysis. For the purpose of developing national compliance costs, therefore, EPA has allocated the entire NRI acreage, adjusted for waivers, according to the distribution shown in the final column of Table 4 16. 31 Table 4 16. National Estimates of Land Area Disturbed Based on National Resources Inventory Totals Type of Construction Acres Based on Permits Data Adjusted NRI Acreage b Number a Pct. of Total Residential Single family 490,231 24.4% 533,878 Multifamily 231,868 11.5% 252,182 Nonresidential Commercial c 1,234,645 61.4% 1,332,476 Industrial 54,630 2.7% 57,523 Total 2,011,374 100.0% 2,176,058 a From Table 4 15. b This column distributes the total acreage estimated in NRI to be converted on an annual basis ( adjusted for waivers) according to the distribution by type of development estimated through analysis of permits data. See also Tables 4 11 through 4 14. c A number of project types were grouped together to form the   commercial   category, , including: hotels/ motels, amusement, religious, parking garages, service stations, hospitals, offices, public works, educational, stores, other nonresidential buildings.

4.4.3 Distribution of Acreage by Project Size The next step in the national compliance cost analysis is to allocate the number of acres in each of the four land use categories according to project size. The project size distribution is based on the survey of municipalities conducted in support of the Phase II NPDES storm water rule ( EPA, 1999) .

This survey identified 14 communities that consistently collect project type and size data as part of their 30 As noted above, EPA estimates there are approximately 159,000 such projects permitted each year.

31 This distribution implies that the acres not accounted for from the NRI ( see Table 4 10) will be costed at the weighted average cost across the single family residential, multifamily residential, commercial, and industrial categories.

4 54 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 construction permitting programs. Table 4 17 shows the distribution by project size for each land use category.

Following allocation to project size class, EPA also allocated the acreage to one of 19 eco

regions, based on geographical information system ( GIS) modeling. Non linearity of installation costs made it inaccurate to consider partial sites. So, these totals were adjusted to ensure that only whole sites would be considered for each category of type, site size, and region. Further detail on this step in the analysis can be found in the Development Document ( U. S. EPA, 2002) .

The final step in the national compliance cost analysis is to multiply the number of acres in each eco region, size class, and land use category by the applicable cost per acre. These costs are shown in Chapter Five.

4.4.4 Estimates of Acreage Covered by Option 2 Table 4 16 above shows the distribution of acreage affected under Option 1 of the proposed rule,

which would apply to sites of one acre or larger. The additional acreage excluded under the site size limitations of Option 2 ( five acres) was obtained by estimating the acreage in sites above one acre and below five acres in size. The 3 acre size class represents projects greater than 1 acre and less than 5 acres. This category was subtracted from the matrix of acreage by region, type, and size class as allocated by the GIS. As shown in Table 4 17, the 14 community study ( EPA, 1999) found that 6.0 percent of acreage developed for single family housing was assigned to sites in the 3 acre size class.

EPA estimated that, after rounding, roughly 6.1 percent of acreage converted to single family housing units would be excluded under Option 2. EPA made similar estimates of the acreage converted to multi

family, commercial, and industrial uses that would be excluded under Option 2. Table 4 18 shows the distribution of acreage affected under Option 2 of the proposed rule.

4 55 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 4 17. Distribution of Permits by Site Size Site Size ( Acres) No. of Permits Acres by Size Pct. Acres by Size Single Family Residential 1 266 266 2.3%

3 228 684 6.0%

7.5 138 1,035 9.0%

25 175 4,375 38.2%

70 30 2,100 18.3%

200 15 3,000 26.2%

Total 852 11,460 100.0%

Multifamily Residential 1 43 43 1.2%

3 100 300 8.6%

7.5 61 458 13.2%

25 71 1,775 51.1%

70 10 700 20.1%

200 1 200 5.8%

Total 286 3,476 100.0%

Commercial 1 266 266 4.8%

3 356 1,068 19.4%

7.5 86 645 11.7%

25 91 2,275 41.3%

70 16 1,260 22.9%

200 0 0 0.0%

Total 815 5,514 100.0%

Industrial 1 39 39 5.7%

3 55 165 23.9%

7.5 10 75 10.9%

25 8 200 29.0%

70 3 210 30.5%

200 0 0 0.0%

Total 115 689 100.0%

4 56   Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 4 17. Distribution of Permits by Site Size Site Size ( Acres) No. of Permits Acres by Size Pct. Acres by Size Total 1 614 614 2.9%

3 739 2,217 10.5%

7.5 295 2,213 10.5%

25 345 8,625 40.8%

70 59 4,270 20.2%

200 16 3,200 15.1%

Total 2,068 21,139 100.0%

Based on permitting data from the following municipalities or counties: Austin, TX; Baltimore County, MD; Cary, NC; Ft. Collins, CO; Lacey, WA; Loudoun County, VA; New Britain, CT; Olympia, WA; Prince George   s County, MD; Raleigh, NC; South Bend, IN; Tallahassee, FL; Tuscon, AZ; and Waukesha, WI ( EPA, 1999) . Source: EPA estimates.

Table 4 18. Estimates of Acreage Affected Under Proposed Rule Option 2 Type of Construction Acreage Affected Under Option 1 a Percent Excluded Under Option 2 b Acreage Affected Under Option 2 Residential Single family 533,878 6.1% 501,100 Multifamily 252,182 8.8% 229,958 Nonresidential Commercial c 1,332,476 20.4% 1,061,108 Industrial 57,523 25.7% 42,733 Total 2,176,058 1,834,898 a From Table 4 15. b Based on analysis of site size distributions found in EPA ( 1999) . c A number of project types were grouped together to form the   commercial   category, , including: hotels/ motels, amusement, religious, parking garages, service stations, hospitals, offices, public works, educational, stores, other nonresidential buildings. Source: EPA estimates.

4 57 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 4.4.5 Operation and Maintenance Costs For any incremental ESC requirements triggered under Option 2, EPA estimated the percentage of capital costs of each technology that would be required annually to operate and maintain the facilities.

Those facilities with a limited useful life were assigned percentages sufficient to replace them at the appropriate time. These were converted to costs per acre for each option. The O& M costs are assumed to be incurred for a one year period during the active phase of construction.

4.5 IMPACTS ON THE NATIONAL HOUSING MARKET 4.5.1 Description of National Housing Market Model EPA takes three complementary approaches to estimating the market impacts of the proposed rule. Two treat the nation as a single market; the third treats each city as a distinct housing market. The first approach assumes all of the costs of compliance with the regulation are passed through to the home buyer. If the home is more costly, fewer households would be able to qualify for a mortgage to purchase it. This change in market size is an indicator of the impact of the proposed regulation. In the second approach, the costs of compliance shift the national housing supply curve in a linear partial equilibrium model. A portion of the increased costs raises the price of new housing while the balance is absorbed by the builder. Higher prices and lower quantities change the welfare of participants in the housing market.

The third approach estimates a linear partial equilibrium model, like the national model, for 215 metropolitan statistical areas ( MSAs) based on local measures of residential construction activity. This approach measures changes in affordability in terms of the Housing Opportunity Index ( HOI) , a well publicized measure of housing availability. The following sections explain each model in detail.

<IP_ADDRESS> Complete Cost Pass Through and Housing Affordability Landis   ( ( 1986) and Luger and Temkin   s ( 2000) surveys suggest that all of the additional costs of compliance with new storm water regulations would be passed through to new home buyers in the form of higher prices for a unit of a given quality. The quantity of new housing built would not change 4 58 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 because demand is driven by demographics more than marginal price considerations, i. e. , demand is inelastic, and competition in supply is limited because of oligopolistic markets in many areas and infinitely elastic supply in others. An increase in the price of a home increases the income necessary to qualify for a home mortgage to purchase the home, and so reduces the number of households able to afford it. One measure of the impact of the regulation is the change in the number of households that can afford the new home.

EPA developed its market model parameters from the previously described model projects,

Census data, and the housing economics literature. Simple assumptions about expected proportionate profit margins, borrowing, and contingencies discussed in Section 4.2 indicate that added incremental compliance costs are multiplied by a factor of 1.5 to 1.8 in the final consumer price. Luger and Temkin ( 2000) report a compliance cost multiplier of 2 to 6 times actual compliance costs. The higher multiplier may reflect a tight housing market in high growth regions. The median house price, from the industry profile, is taken as the baseline price. The median price, P0 , with the additional compliance costs, C,

multiplied by a factor for added time and borrowing, m, equals the new price, PN , which is the starting point for calculating the effect of the proposed regulation on affordability, welfare measures, and other market model results:

P N   P 0 % mC ( 1)

where:

P N   New Price with ESC Compliance Costs P 0   Median New Home Price m   Cost Multiplier C   ESC Compliance Costs The monthly payment for principal, interest, taxes, and insurance ( PITI) for the new home is based on the new price:

4 59 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 FP N ( r PI   12 )

( 2)

12 ) & 360 1 & ( 1 % r P N T   t ( 3) 1, 000 P N I   s ( 4) 1, 000 PITI   PI % T % I ( 5)

where:

PI   Monthly Principal and Interest F   Proportion of New Home Cost that is financed r   Annual Mortgage Interest Rate T   Monthly Tax Payment t   Monthly Tax Rate per Thousand Dollars Value I   Monthly Insurance Premium s   Monthly Insurance Rate per Thousand Dollars Value PITI   Principal , Interest , Taxes , and Insurance Fannie Mae guidelines limit borrowers   PITI payments to no more than 28 percent of their gross income. .

The value for F, 0.774, and r, 0.0752, the mortgage terms, are national averages for the typical 30 year fixed rate, private mortgage in the base period ( FHFB, 2001) . Values for t, $ 1/ $ 1,000 value, and s,

$ 0.25/ $ 1,000 value, are from a recent study of housing affordability ( Savage, 1999) . The gross income necessary to qualify for the mortgage at the new price, under this criterion, Y, is given by:

4 60 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Y   12 PITI ( 6) 0. 28 Table 4 19 illustrates the calculations using Option 2 costs. In Chapter Five, EPA uses this approach to estimate the number of households priced out of the new housing market as a result of each regulatory option or combination of options.

Table 4 19. Change in Housing Affordability   Sample Calculation Source: EPA estimates. Data element Baseline Option 2 Average per lot cost difference from baseline Difference in cost per lot times multiplier $ 0 $ 0 $ 111 $ 201 Home price $ 288,397 $ 288,598 Principal and interest Real estate taxes Homeowner' s insurance Total principal, interest, taxes, and insurance $ 1,564 $ 288 $ 72 $ 1,924 $ 1,565 $ 289 $ 72 $ 1,926 Income necessary to qualify for mortgage Change in income necessary Number of households shifted ( thousands)

Percent change in number of qualified households $ 82,472 $ 0 0 0.0% $ 82,529 $ 58  29  0.15%

The change in the number of households who qualify for a mortgage to finance the baseline home price but cannot afford the home with the added compliance costs is imputed from Census Bureau statistics of household income. The Census Bureau, Current Population Survey, reports the money income of households in 21 income classes from zero to over $ 100,000 ( U. S. Census Bureau 2000d) .

Table 4 20 shows the Census distribution. Each income class, except the top one, spans $ 5,000 in annual income. If households are evenly distributed within each class, then a change of $ 1,000 from the baseline income necessary to qualify to the new income necessary excludes one fifth of the members of the income class from qualifying for the new mortgage level. Since the incremental costs of compliance 4 61 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 are relatively small, the new price usually falls within the same income class as the baseline price and the number of households per $ 1,000 change in price is adequate to find the change in number of qualifying households. If the qualifying income for the baseline price is in a different income class than the qualifying income for the new price, the number of households per $ 1,000 change in price in each class is calculated and the number of households disqualified calculated in parts.

Table 4 20. Household Information for Imputing Changes in Ownership Possibilities a Calculated from proportion of owner occupied to total housing units multiplied by number of households in income class. Source: Household Income: U. S. Census Bureau, Current Population Reports, P60 209, Money Income in the United States: 1999, U. S. GPO: Washington, 2000; Housing: U. S. Census Bureau, American Housing Survey for the United States: 1999, Table 2 12 Income Characteristics of Occupied Units, http: / / www. census. gov/ hhes/ www/ housing/ ahs/ ahs99/ tab212. html Current Population Survey American Housing Survey Annual Household Income ( $ 1,000) Households ( 1,000) Households That Own Home a ( 1,000) Percent Owned for Income Class Total Housing Units ( 1,000) Owner Occupied Units ( 1,000)

< 5 5 9 10 14 15 19 20 24 25 29 30 34 35 39 40 44 45 49 50 54 55 59 60 64 65 69 70 74 75 79 80 84 85 89 90 94 95 99 100> Total 3,010 6,646 7,661 7,482 7,238 6,890 6,381 6,016 5,565 4,958 4,789 4,064 4,112 3,380 2,927 2,903 2,526 2,023 1,736 1,568 12,832 104,707 1,456 3,051 3,906 3,935 3,946 4,000 3,891 3,794 3,875 3,452 3,674 3,118 3,360 2,762 2,392 2,372 2,227 1,784 1,531 1,383 11,674 70,071 48.4% 45.9% 51.0% 52.6% 54.5% 58.1% 61.0% 63.1% 69.6% 69.6% 76.7% 76.7% 81.7% 81.7% 81.7% 81.7% 88.2% 88.2% 88.2% 88.2% 91.0% 66.9% 5,839 6,728 7,780 7,037 7,369 6,867 7,469 5,951 9,778   8,184   11,985       6,548       11,267 102,802 2,824 3,089 3,967 3,701 4,017 3,987 4,555 3,753 6,808   6,278   9,793       5,774       10,250 68,796 The proportion of households in the marginal income class that already own their home indicates the size of the market possibly affected. According to the Census Bureau   s American Housing Survey, in 4 62 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 1999, 48.4 percent of households with less than $ 5,000 income owned their own home while 91 percent of those with income over $ 100,000 annually own their home. Overall, 66.9 percent of households own their home. 32 The rate of home ownership for the larger income classes from the housing survey was applied to all of the income classes of the population survey within the same range ( indicated by the ditto marks in Table 4 20) . The total number of households with income greater than that required to qualify for the baseline home is the total number of households that could afford the baseline home. Since this is the group that may be in the market for a new home, substantial changes in the proportion of this group that can afford it may represent large changes in the size of the market for new homes attributable to the construction and development regulation.

<IP_ADDRESS> National Partial Equilibrium Modeling Another approach to evaluating the impact of the proposed regulation on housing markets is based on a household production function partial equilibrium model. Empirical studies find a highly elastic supply and a somewhat inelastic demand for new housing ( DiPasquale, 1999) . These estimated elasticities and the assumption that compliance costs of new environmental regulations result in only marginal changes in prices and quantities allow the market to be modeled with a simple linear partial equilibrium market model similar to the ones used in other recent EPA regulations ( U. S. EPA, 2001b) .

The modeling situation is similar to that used by Montgomery ( 1996) to forecast wood product demand. The linear partial equilibrium model can be viewed as a reduced form of a more complex structural model. We can assume, for example, that all of the instrumental variables are the same in both the baseline and alternatives, i. e. , the regulation does not change U. S. population growth, carpenters   wages, wood product prices, and so forth. Montgomery   s ( 1996) modeling equation ( equation 12 in the paper) is simply a linear supply curve and equations 6, 8, and 10 reduce to a linear demand curve. The simpler model will provide the same results as the more complex structural model given small marginal changes in costs and unchanging long run assumptions.

32 The American Housing Survey uses fewer income groups than the Current Population Survey.

4 63 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 National statistics of residential housing starts from the Census of Construction establish the baseline quantity for the model. The baseline price is the median new home price derived from the project cost model. This combination is the baseline market equilibrium where supply equals demand.

To indicate highly elastic supply, EPA assumes a price elasticity of supply of 4.0. DiPasquale ( 1999)

cites studies with estimates for new housing supply elasticity from 0.5 to infinity but the majority of the long run estimates are in the 3 to 13 range. Housing demand elasticity is equally controversial. EPA assumes a price elasticity of demand of  0.7 to indicate a somewhat inelastic demand function.

Sensitivity tests of these assumptions are shown in Appendix 5B.

Given a baseline equilibrium point ( P0 , Q0 curve. ) and these elasticities, EPA identified a linear supply Q   " % $ P ( 7)

Where:

Q   Number of residential building permits issued P   Price of new home "   Intercept calibrated from baseline equilibrium   Q 0 & $ P 0 $   Coefficient on price   E s × Q 0 P 0 E s   Supply elasticity of new homes > 0 A linear demand curve was derived similarly.

4 64 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Q   F % ( P ( 8)

Where:

F   Intercept calibrated from baseline equilibrium   Q 0 & ( P 0 (   Coefficient on price   E d × Q 0 P 0 E d   Demand elasticity of new homes < 0 EPA assumes the baseline condition is in equilibrium so these two equations are equal. The increased costs of compliance raise builders   costs and shift the supply curve upward to the left. . The change in prices and quantities depends on the relative slopes of the supply and demand curves. EPA chose to model the increased costs as a slope preserving change in the supply curve intercept, " , rather than an elasticity preserving change in slope. The new intercept is calculated as:

"   Shocked intercept s ( 9)   Q 0 & $ ( P 0 % ESC)

where ESC is the per unit costs of compliance with the proposed regulation. The new price is given by:

" S & F P N   ( & $ ( 10)

Equilibrium prices and quantities are then recalculated using the new price and shocked intercept.

Unlike the complete cost pass through method described above, some of the costs of compliance in the partial equilibrium model may be absorbed by the builder. The proportions flowing to consumers 4 65 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 and builders depends on the relative elasticities of supply and demand. The literature suggests cost pass through rates are very high in this industry ( DiPasquale, 1999) . With the supply and demand elasticities selected as representative of the literature, Es = 4 and Ed =  0.7, the cost pass through is 85 percent. Thus,

the industry absorbs 15 percent of the costs of compliance and passes the remainder on to home buyers as a price increase.

The partial equilibrium model has a number of implications for the welfare of society. When the supply curve shifts following introduction of incremental compliance costs, consumers lose some of their benefits from the product in absorbing those compliance costs. This results in a loss of consumer surplus. How the consumer surplus is lost is irrelevant from a welfare economics perspective.

Consumers may choose cheaper options in the construction of their new homes such as lower quality carpets or cabinets. They may accept less expensive, smaller homes. Or, they may just pay the higher price and forego other spending. In any case, the home would provide less utility than it might have without the ESC costs. Different choices would affect which industries feel the impact in the regional economy. Changes in housing options would impact builders and suppliers. Decreased overall spending would impact a wide range of consumer goods industries. For simplicity, EPA assumed that consumers would reduce other spending in response to the price change. The reduction in home sales volume and consumer spending in other sectors reduces employment in construction and all other parts of the economy. Indirect effects of the regulation on the whole economy are estimated using Regional Input

Output Modeling System ( RIMS) multipliers published by the U. S. Department of Commerce. The multiplier analysis indicates the ultimate changes in gross domestic output and employment attributable to the new regulation.

<IP_ADDRESS> Regional Partial Equilibrium Modeling and the Housing Opportunity Index Each of the approaches described above treats housing as a national market with the same demand elasticities applying across the country. In reality, however, market conditions can vary widely from region to region, state to state, and city to city. Markets vary both in the level of activity and the structure of the industry. Costs of compliance would undoubtedly be easier to pass through to consumers in a hot housing market than in a depressed market. EPA   s third modeling approach captures such 4 66 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 regional variation by setting up a partial equilibrium model for each Metropolitan Statistical Area ( MSA)

and using statistics of the level of activity in the MSA to select the parameters of the model.

The Census Bureau collects information about housing starts as well as the size of the existing housing stock at the MSA level. EPA infers that where housing built during the 1990s represents a large proportion of the total current housing stock, the new housing market is active and demand would be expected to be less elastic than in areas with slower growth. As discussed above, the long run supply of new housing is assumed to be quite elastic overall. These facts provide the basis for selecting elasticities to represent housing markets at the MSA level.

EPA developed separate partial equilibrium models for each MSA. Like the national models described above, EPA used building permit and median new home price data to establish the baseline equilibrium point for each MSA. Demand elasticities were estimated based on the ratio of new housing units authorized to housing stock over the period 1990 to 1996 ( Census, 1998) . EPA mapped regions where this ratio is lowest to the most elastic estimates of demand found in the literature and those where the ratio is highest to the least elastic demand elasticity estimates. EPA believes this approach captures the relative differences in demand elasticity between active and depressed housing markets around the country.

Each MSA model is shocked with the estimated compliance costs for the median new home in the region. The model then estimates changes in prices, quantities, and welfare measures for each MSA.

As there are more than 200 MSAs, it is not practical to report all of the individual results. Instead, all of the MSAs in a Census division are averaged together to give a sense of the effect of compliance costs on each region of the nation.

Affordability is a significant concern for some stakeholders. The National Association of Home Builders ( NAHB) publishes the Housing Opportunity Index ( HOI) for 180 MSAs. HOI measures the proportion of the housing stock a family with the median income can afford. NAHB compares the median family income to the actual distribution of home prices in the MSA. EPA does not have access to such detailed price information. Instead, EPA assumes home prices are normally distributed about the median with standard deviation of 1. Thus, our rough HOI ( RHOI) is the cumulative probability of homes with prices less than the maximum PITI that the median income can afford.

4 67 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Algebraically:

30 ( Median Income × 0. 28) e rt dt RHOI   Z ( 1, 1) ( m 0 ) ( 11) Median Sales Price The numerator represents the present value of the maximum PITI payment that the median income can afford at the prevailing mortgage rate, r, over a typical 30 year fixed rate loan. The denominator is simply the median sales price. When this ratio is equal to one, the median income family can afford the median sales price home or, equivalently, half the families can afford the median sales price home. The normal cumulative density function with mean of one and variance of one, is represented by Z( 1,1) ( @ ) .

Thus, if the median income family can afford more than the median sales price home, the ratio will be greater than one, and the Z( 1,1) ( @ ) function will indicate the proportion of homes the family can afford.

For MSAs with HOIs reported by NAHB, EPA adjusts the variance of the normal curve so that RHOI yields the NAHB baseline HOI index ( NAHBHOI) . The variance scaling factor is:

Z & 1 ( 0, 1) ( RHOI ) V   * Z & 1 * ( 12)

( 0, 1) ( NAHBHOI )

where Z( 0,1)  1 is the inverse of the standard normal cumulative distribution. Changing the variance of Z( 1,1)

from one to V causes RHOI to equal NAHBHOI at the observed median family income. In those MSAs where NAHB does not calculate HOI, unadjusted RHOI is reported. 33 To assess the impact of the regulation, the adjusted HOI is calculated with the new sales price from the market model. The percent change in adjusted HOI is an indicator of the added stress of compliance costs on the housing market.

Like the full pass through model discussed above, the MSA HOI model shows how changes in costs affect home buyers. This approach has the advantage of recognizing local market differences and 33 In 13 MSAs, the distribution of home prices is so different from normal that RHOI cannot approximate NAHBHOI with the variance adjustment. These MSAs were deleted from the results.

4 68 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 applying them within the model. Average HOI among MSAs in Census divisions before and after compliance costs are reported in Chapter Five.

4.5.2 Inputs to the National Housing Market Model The analysis uses the average price of the model home worked out in Section 4.2, $ 284,632, as a starting point. Buyers in 2000 financed an average of 77.4 percent of the home purchase price at an interest rate of 7.52 percent ( FHFB, 2001) . EPA assumes a 30 year conventional fixed rate mortgage for ease of calculation. EPA also assumes a monthly real estate tax rate of $ 1 per $ 1,000 of home value and insurance payment of $ 0.25 per $ 1,000 of home value ( Savage 1999) . These assumptions are applied to the revised home price to derive an estimate of the monthly principal, interest, taxes, and insurance ( PITI)

payment generally required to purchase a new home.

In Chapter Five EPA uses this approach to estimate the number of households priced out of the new housing market as a result of each regulatory option.

4.5.3 Multifamily and Non Residential Construction Market Models EPA developed three market models of the multifamily and non residential construction industry.

All three are similar to the residential regional partial equilibrium model. They treat each state as a separate market with adjusted demand elasticities. Each model produces estimates of changes in prices,

quantities, and welfare measures.

The commercial market is highly disaggregated into regional markets. Office rents for similar buildings ( Class A space) range from $ 17/ square foot/ year in Wichita to more than $ 60/ square foot/ year in San Francisco ( Grubb & Ellis 2001) . This disparity shows that arbitrage among markets is not possible and space in each area should be considered a different commodity. Many real estate companies maintain data on conditions in regional markets. Typically, activity in the market is measured in terms of the vacancy rate and asking rents. EPA developed a market model for office space similar to the regional partial equilibrium models developed for residential construction to indicate the effects on commercial construction.

4 69 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 The Census Bureau discontinued collection of non residential building permit information in 1994. To estimate non residential building permits issued in later years, EPA regressed non residential building permits on residential building permits, the value of non residential buildings put in place ( VPIP) ,

and a time trend. Since the relationship among these variables differs from state to state, regressions were estimated at the state level. Three different regressions were estimated. Several states showed a distinct shift in building permits data when the Census sample changed from 17,000 permit granting jurisdictions to 19,000 jurisdictions in 1983. In states where this difference was apparent, only observations after 1983 were used in the final projection. In addition some states had strong trends which were correlated with residential building permits. Since this multicollinearity reduced the influence of residential building permit data in later projection years, a regression was also estimated without the trend variable. The three regressions are:

  1980 1994 data;

  1983 1994 data; and   1980 1994 data estimated without the trend variable.

Each regression was also estimated using only data through 1993 to test their ability to forecast the next year outside of the sample, i. e. , 1994. The regression which gave the best out of sample projection to 1994 and/ or had the highest correlation coefficient for the state was selected to be used for that state   s projection. Thus, each state projection uses the model that best predicts its pattern of non residential development. EPA allocates the number of non residential building permits estimated for each state to commercial, industrial, and other projects based on the number of permits issued for each type of project in the 1994 building permit data. The commercial category is a catch all which includes public buildings,

hotels, amusements, and educational buildings, in addition to office and retail buildings. EPA implicitly assumes that these projects would employ best management practices that are similar to those required for office or retail space. A separate category for industrial projects and a third category for non building permits are also allocated from the 1994 data.

In the partial equilibrium model, the quantity of construction in each category is measured by the number of building permits issued. Rental rates, in dollars per square foot per year, are closely watched indicators of demand for commercial space and serve as our price. Rents and activity reports for 35 retail space markets around the country from a recent real estate marketing firm report ( Grubb and Ellis, 2001)

4 70 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 provide the baseline information for the market model. Like the ratio of new building permits to housing stock in the residential model, EPA used the activity reports to create a scale of demand intensity which was then used to map to each market an appropriate demand elasticity from a range of possible market elasticities.

Demand for office and retail space is relatively insensitive to small changes in price. Since non

residential construction activity tends to be driven by interest rates, job growth, and locational factors rather than building costs, cost pass through is very high. Huffman ( 1988) , for example, found that impact fees were largely passed on to end users in the long run. EPA therefore applies a range of elasticities from  0.01 to  0.80 to represent relatively inelastic demand for commercial space. In regions with many vacancies, lessees can be more sensitive to price so a more elastic demand curve is used. In regions with tight markets, lessees have fewer options and generally have little choice but to pay the asking price, so demand is less elastic. Builders can pass on a higher proportion of their costs in tight markets than in soft markets. Even in the softest market, however, 83 percent of costs are passed through to consumers with these assumptions.

The number of non residential building permits was projected at the state level while the Grubb and Ellis commercial data is from 35 selected cities. Since there is insufficient building permit data to model each city, EPA models each state as a separate market with the average rent and activity rate for the cities within the state representing the state market. The assumption is reasonable where state office and retail markets are concentrated in one city, or one city is representative of general statewide market conditions. The assumption is less defensible in large states with many population centers, since market conditions may vary from city to city within such states. Almost half of the states were not represented by cities in the Grubb and Ellis data. For these states, the average rent and activity values for cities within the Census division containing the state were used to indicate state market conditions.

The industrial space market model is similar to the commercial model. It uses the vacancy rate for industrial space as an indicator of market activity and the rental rate for warehouse space as the price.

Industrial space users are considerably more mobile and price sensitive than commercial or residential space consumers so demand for industrial space is more elastic. The range used in this analysis is  0.2 to  1.5.

4 71 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 The multifamily housing market model uses the same format as the non residential models. The activity measure is the proportion of the housing stock built in the 1990 to 1996 time period. Separate price series or rental rates for multifamily housing are not reported so the single family housing prices were taken as a near substitute. EPA assumed that elasticities of demand are also similar to those for single family housing.

The multifamily and non residential models apply equations 7 through 10 above to estimate supply and demand curves. Compliance costs are converted to the same units as the rental rates, given the model project. The increase in cost shifts the supply curve to the left and upward. Market results may be reported in terms of changes in rents and building permits, as well as changes in consumer and producer surplus, and can be converted to changes in indirect employment using the RIMS II multiplier.

4.6 NET ECONOMIC IMPACTS Environmental regulations, while imposing costs on the regulated industry, may also provide a stimulus to firms that make or install environmental controls, or provide other services related to reglatory compliance. The output and jobs created by new spending in the environmental industry offsets, to some extent, the loss of output in the affected industry. In the case of C& D, the same firms that now do much of the site preparation work would also be charged with implementing ESCs, and likely, conducting ESC certification and inspection. Contractors would be hired to build sedimentation ponds, improve grades, and construct any incremental ESCs triggered by the proposed regulation. Thus,

while the regulation is costly in one sense, much of that cost flows directly back into the industry,

stimulating more activity, output, and employment.

4.6.1 Welfare Effects In terms of the welfare effects discussed in Section 4.5.1, both the consumer and producer surpluses are converted to costs of production. Consumer surplus represents income that would have been used by consumers to purchase other products or for enjoyment. Producer surplus would have flowed to the owners of the firm and probably to consumption or investment in other industries. Both 4 72 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 quantities thus flow out of the construction sector. Only to the extent that the compliance costs that would be absorbed are greater than the sum of production loss plus the consumer surplus lost would the regulation result in a net increase in activity in the construction sector.

Both the loss and the gain in employment are estimated by applying RIMS II multipliers to the changes in output derived from the market models. Construction activity generates approximately 37.8 jobs per million dollars of output while general consumer spending generates only 27.3 jobs per million dollars of spending. Shifting spending from consumers to construction would increase overall employment. As some readers may be interested in both the losses and gains in construction employment, both aspects are shown in Chapter Five, as well as the loss in employment from lost consumer spending.

4.6.2 Regional Impacts For this analysis, EPA examines the potential impacts to specific regions by assessing whether the proposed C& D regulations could have community or regional level impacts. Such impacts could alter the competitive position of the C& D industry across the nation or lead to growth or reductions in C& D activity ( in or out migration) in different regions and communities. Traditionally, the distribution of C& D establishments has echoed the general regional distribution of U. S. population, with some parts of the industry responding to short or long term shifts in population distribution.

EPA does not expect that the proposed C& D regulations would have a significant impact on where construction and development takes place, or the regional distribution of construction and development activity. On the one hand, regulatory costs would be lower in regions with lower rainfall and reduced soil erodibility. This would tend to favor projects being developed in such regions. At the same time, however, a project located in a low rainfall region would rarely be a perfect substitute for the same project in a high rainfall region. So many factors go into a locational decision that few homeowners, companies, or industrial firms are likely to make their decision on where to build based solely upon the relative costs of storm water controls. Thus, EPA does not expect the proposed C& D regulations to significantly influence the prevailing pattern of construction and development activity.

4 73 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 EPA   s market model accounts for regional market influences by creating state and MSA level partial equilibrium models for each sector. These models are used to quantify the regional impacts in terms of output and employment. Like the national employment effects, state employment changes are calculated using RIMS II multipliers. Regional multipliers were not available for this analysis so the national multipliers were used. The results, therefore, overstate the employment impacts within the region but indicate the effect of changes within the region on the nation as a whole. Tables summarizing state impacts are included in Chapter Five.

4.6.3 International Trade As part of its economic analysis, EPA has evaluated the potential for changes in U. S. trade ( imports, exports) of construction and development related goods and services. A significant component of the U. S. construction and development industry operates internationally, and in addition numerous foreign firms operate in the U. S. EPA judged, however, that the potential for U. S. construction and development firms to be differentially affected by the proposed rule is negligible. The proposed rule would be implemented at the project level, not the firm level, and would affect only projects within the U. S. All firms undertaking such projects, domestic or foreign, would be subject to the proposed rules.

U. S. firms doing business outside the U. S. would not be differentially impacted compared to foreign firms, nor would foreign firms doing business in the U. S.

The proposed rule may stimulate or depress demand for some construction related goods. To the extent that the proposed rule acts to depress the overall construction market, demand for conventional construction related products may decline. This decline may be offset by purchase of goods and services related to storm water management. Overall, EPA does not anticipate that any shifts in demand for such goods and services resulting from the proposed regulation would have significant implications for U. S.

and foreign trade.

4 74 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 4.7 GOVERNMENT IMPACTS 4.7.1 Administrative Costs EPA has analyzed the administrative costs to governments associated with the proposed rule.

EPA assumes that the majority of construction related regulatory costs would be associated with processing general permits. As noted previously, EPA assumes that the majority of NPDES Phase I and Phase II NPDES storm water permit programs are fully implemented, and that any new regulatory requirements would be superimposed upon these programs.

Under Option 1, EPA assumes that no incremental costs would be imposed on governmental units. Under Option 2, EPA estimates that each state would incur costs to revise existing regulations to reflect the shift of regulatory coverage from Part 122 to Part 450. Based on the assumption that all states would change their storm water programs to include certification of sedimentation basins and other aspects of the proposed rule, EPA estimated the costs of establishing such a program. The costs are based on assumptions about the number of labor hours states would allocate to amending such programs,

and the applicable labor rate. Further details on these assumptions and costs can be found in the Development Document ( EPA, 2002) .

4.7.2 Compliance Costs EPA estimates that government entities ( federal, state, and local) commission as much as one quarter of the total value of construction work completed in the U. S. each year. As final owner of a substantial amount of the industry output, governments would bear some of the compliance costs associated with the proposed rule, assuming these costs are passed on from developers and builders. In Chapter Five, Section 5.8, EPA allocates the government share of compliance costs based on the government share of industry output. Further details about government costs can also be found in Chapter Ten.

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U. S. Small Business Administration, 1999. Employer Firm Births and Deaths by Employment Size of Firm, 1989 1998. Available at: http: / / www. sba. gov/ advo/ stats/ dyn_ b_ d8998. pdf.

Wright, 1996. Paul H. Wright. Highway Engineering, 6 th edition. New York: John Wiley & Sons. 1996.

4 78 APPENDIX 4A Data and Modeling Assumptions for Model Project Analysis Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 4A 1. Model Parameters and Data Sources Parameters Single family Residential Multifamily Residential Small Commercial ( Shopping Center) Industrial Building Value Data Source Value Data Source Value Data Source Value Data Source Size of parcel 1, 3, 7.5, 25, 70, and 200 acres EPA assumption 1, 3, 7.5, 25, 70, and 200 acres EPA assumption 1, 3, 7.5, 25, 70, and 200 acres EPA assumption 1, 3, 7.5, 25, 70, and 200 acres EPA assumption Cost of raw land $ 40,000 per acre NAHB Chicago focus groups, based on experience of the Chicago area participants. See Appendix B for further discussion. $ 40,000 per acre NAHB Chicago focus groups, based on experience of the Chicago area participants. See Appendix A for further discussion. $ 297,545 per acre Urban Land Institute ( ULI) Market Profiles 2000: North America. Median land cost for nonregional shopping centers ( cost ranges for individual MSAs were averaged before taking the median) $ 137,500 per acre Urban Land Institute ( ULI) Market Profiles 2000: North America. Median land cost for industrial parks ( cost ranges for individual MSAs were averaged before taking the median) .

Average Lot Size 0.33 acres Census Report C25 ( Characteristics of New Housing, 1999) reports an average lot size for new single family homes sold of 12,910 square feet, which represents a density of close to 3 lots per acre. ( The median lot size is 8,750 square feet, which implies a density of almost 5 lots per acre) . N/ A N/ A N/ A Approximate Density ( number of lots per acre) 2.67 Calculated based on impervious surface ratios from   Chesapeake Bay Watershed Impervious Cover Results by Land Use Polygons,   to account for impervious surfaces not associated with individual lots. Total number of lots is rounded to nearest whole number. N/ A N/ A N/ A 4A 1 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 4A 1. Model Parameters and Data Sources Parameters Single family Residential Multifamily Residential Small Commercial ( Shopping Center) Industrial Building Value Data Source Value Data Source Value Data Source Value Data Source Due diligence $ 2,500 per acre Based on $ 100,000 for a hypothetical 40 acre development discussed by the NAHB Chicago focus group participants. See Appendix B for further discussion. $ 2,500 per acre See Single family Residential Data Source for details. $ 2,500 per acre See Single family Residential Data Source for details. $ 2,500 per acre See Single family Residential Data Source for details.

Land development costs $ 25,000 per lot Estimate from NAHB Chicago focus groups. This figure includes any construction activities related to land development ( e. g. infrastructure costs) . $ 75,000 per acre Scaled estimate based on $ 25,000 per lot from NAHB Chicago focus groups. This figure includes any construction activities related to land development ( e. g. infrastructure costs) . $ 75,000 per acre Scaled estimate based on $ 25,000 per lot from NAHB Chicago focus groups. This figure includes any construction activities related to land development ( e. g. infrastructure costs) . $ 75,000 per acre See Small Commercial Data Source for details.

Engineering costs, as percent of land development costs 6% Estimate from NAHB Chicago focus groups. 6% Estimate from NAHB Chicago focus groups. 6% Estimate from NAHB Chicago focus groups. 6% Estimate from NAHB Chicago focus groups.

Overhead costs, as percent of development costs 10% Estimate from NAHB Chicago focus groups. 10% Estimate from NAHB Chicago focus groups. 10% Estimate from NAHB Chicago focus groups. 10% Estimate from NAHB Chicago focus groups.

Contingency, as percent of land development costs prior to impact fees 10% Estimate from NAHB Chicago focus groups. 10% Estimate from NAHB Chicago focus groups. 10% Estimate from NAHB Chicago focus groups. 10% Estimate from NAHB Chicago focus groups.

Impact fees $ 15,000 per lot Estimate from NAHB Chicago focus groups. See Appendix B for further discussion. $ 45,000 per acre Scaled estimate based on $ 15,000 per residential lot from NAHB Chicago focus groups. See Appendix A for further discussion. $ 45,000 per acre See Multifamily Data Source for details. $ 45,000 per acre See Multifamily Data Source for details.

4A 2 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 4A 1. Model Parameters and Data Sources Parameters Single family Residential Multifamily Residential Small Commercial ( Shopping Center) Industrial Building Value Data Source Value Data Source Value Data Source Value Data Source Real estate and marketing fees, as percent of sales price of building 7% Estimate from NAHB Chicago focus groups. 7% Estimate from NAHB Chicago focus groups. 7% Estimate from NAHB Chicago focus groups. 7% Estimate from NAHB Chicago focus groups.

Average size of building 2,310 square feet From Census Report C25, the average size of new single family homes sold in 1999 and conventionally financed was 2,310 square feet. Varies Scaled to site size based on impervious surface ratios from   Chesapeake Bay Watershed Impervious Cover Results by Land Use Polygon.   Varies Scaled to site size based on impervious surface ratios from   Chesapeake Bay Watershed Impervious Cover Results by Land Use Polygon.   Varies Scaled to site size based on impervious surface ratios from   Chesapeake Bay Watershed Impervious Cover Results by Land Use Polygon.   Cost of building construction $ 53.80 per sq. ft. From NAHB   s website, construction costs for a generic single family house are $ 124,276. $ 124,276 ÷ 2,310 = = $ 53.80. See Appendix B for further discussion. $ 54.05 per sq. ft. R. S. Means Building Construction Cost Data median construction cost per square foot for a   typical   low  rise ( 1 3 stories) apartment building. $ 53.85 per sq. ft. R. S. Means Building Construction Cost Data median construction cost per square foot for a   typical   supermarket $ $ 36.15 R. S. Means Building Construction Cost Data median construction cost per square foot for a   typical   industrial warehouse.

Total Paved Surface Area ( Parking, Driveways, and Roads) N/ A Varies Scaled to site size based on impervious surface ratios from   Chesapeake Bay Watershed Impervious Cover Results by Land Use Polygon.   Varies Scaled to site size based on impervious surface ratios from   Chesapeake Bay Watershed Impervious Cover Results by Land Use Polygon.   Varies Scaled to site size based on impervious surface ratios from   Chesapeake Bay Watershed Impervious Cover Results by Land Use Polygon.   Paving Cost ( Parking, Driveways, and Roads) N/ A $ 1.44 per sq. ft. R. S. Means Heavy Construction Cost Data $ 1.44 per sq. ft. R. S. Means Heavy Construction Cost Data $ 1.44 per sq. ft. R. S. Means Heavy Construction Cost Data Total Sidewalk Area N/ A Varies Scaled to site size based on impervious surface ratios from   Chesapeake Bay Watershed Impervious Cover Results by Land Use Polygon.   Varies Scaled to site size based on impervious surface ratios from   Chesapeake Bay Watershed Impervious Cover Results by Land Use Polygon.   Varies Scaled to site size based on impervious surface ratios from   Chesapeake Bay Watershed Impervious Cover Results by Land Use Polygon.   4A 3 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 4A 1. Model Parameters and Data Sources Parameters Single family Residential Multifamily Residential Small Commercial ( Shopping Center) Industrial Building Value Data Source Value Data Source Value Data Source Value Data Source Sidewalk Construction Cost N/ A $ 4.66 per sq. ft. R. S. Means Heavy Construction Cost Data $ 4.66 per sq. ft. R. S. Means Heavy Construction Cost Data $ 4.66 per sq. ft. R. S. Means Heavy Construction Cost Data Percent of total land cost that a developer can finance for land acquisition 65% Loan to value ratio as written in the Real Estate Lending Rules. See Appendix B for further discussion. 65% See Single family Residential Data Source for details. 65% See Single family Residential Data Source for details. 65% See Single family Residential Data Source for details.

Percent of total land cost that a developer can finance for land development 70% Loan to value ratio as written in the Real Estate Lending Rules. See Appendix B for further discussion. 70% See Single family Residential Data Source for details. 70% See Single family Residential Data Source for details. 70% See Single family Residential Data Source for details.

Percent of total building construction cost that a builder can finance 80% Loan to value ratio as written in the Real Estate Lending Rules. See Appendix B for further discussion. 80% See Single family Residential Data Source for details. 80% See Single family Residential Data Source for details. 80% See Single family Residential Data Source for details.

Loan interest rate for builder/ developer 7.5% EPA estimate. 7.5% EPA estimate. 7.5% EPA estimate. 7.5% EPA estimate.

Term of land acquisition loan, years 3 EPA assumption. Assumes that the land acquisition loan is paid off over the life of the project, which in this case is 3 years. 3 See Single family Residential Data Source for details. 3 See Single family Residential Data Source for details. 3 See Single family Residential Data Source for details.

Term of land development loan, years 1 EPA assumption. Assumes that the land development loan term is equal to the length of the development phase of the project, which in this case is 1 year. 1 See Single family Residential Data Source for details. 1 See Single family Residential Data Source for details. 1 See Single family Residential Data Source for details.

4A 4 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 4A 1. Model Parameters and Data Sources Parameters Single family Residential Multifamily Residential Small Commercial ( Shopping Center) Industrial Building Value Data Source Value Data Source Value Data Source Value Data Source Term of building construction loan, years 1 EPA assumption. Assumes that the construction loan term is equal to the length of the construction phase of the project, which in this case is 1 year. 1 See Single family Residential Data Source for details. 1 See Single family Residential Data Source for details. 1 See Single family Residential Data Source for details.

Assumed pre tax profit on land development 10% NAHB Chicago focus group estimated 12 14 percent; 10 percent is an EPA assumption. See Appendix B for further discussion. 10% See Single family Residential Data Source for details. 10% See Single family Residential Data Source for details. 10% See Single family Residential Data Source for details.

Assumed pre tax profit on construction 10% NAHB Chicago focus groups estimated 8 to 12 percent pre tax at time of sale. R. S. Means uses 10 percent as a profit assumption in their Cost Data book series. 10% See Single family Residential Data Source for details. 10% See Single family Residential Data Source for details. 10% See Single family Residential Data Source for details.

4A 5 APPENDIX 4B Detailed Description of Model Parameters and Assumptions Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Cost of Raw Land Land prices tend to vary by region of the country, and even within particular regions, depending on the exact location of the parcel ( e. g. , urban proximity) . For this generic single family project cost model, a value of $ 40,000 per acre is used based on the estimate provided by participants in the Chicago NAHB focus group morning session. The participants in the NAHB Dallas focus group meetings confirmed that even within one state lot prices can range dramatically. Prices per lot were reported to range from near $ 10,000 in El Paso, TX, to nearly $ 1 million in Austin ( for lake front property) . ( Note,

these costs cited were per lot, not per acre) . The single family development land cost estimate was also used in the multifamily residential project model due to lack of other data.

Land prices for the commercial and industrial models were taken from the Urban Land Institute   s ( ULI) Market Profiles 2000: North America, which lists average land costs for shopping centers and industrial parks for selected Metropolitan Statistical Areas ( MSAs) depending on data availability. The median land cost for each project type was calculated from a list of MSA average land costs and used in the models as a national estimate proxy.

Due Diligence As described previously, due diligence refers to the work done by the developer prior to taking ownership of a parcel. During this time the developer conducts a variety of environmental and engineering assessments to identify any potential obstacles to the successful completion of the proposed development. At this time the only estimates for due diligence costs are based on a $ 100,000 estimate provided by the Chicago NAHB focus group participants for a 40 acre project. This figure was converted to $ 2,500 per acre on the assumption that these costs would fluctuate depending on the size of the project.

Impact Fees The NAHB   s Chicago focus group estimated the impact fees on new residential construction to average $ 15,000 per lot. This figure was converted to $ 45,000 per acre for use in the multifamily,

commercial, and industrial project models.

4B 1 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 This is one of many estimates that may be found in the literature. In their book Red Tape and Housing Costs , Michael Luger and Kenneth Temkin interviewed numerous builders and developers in New Jersey and North Carolina, and received several estimates for impact fees in North Carolina.

Estimates ranged from approximately $ 2,800 to $ 6,547 per unit in Cary, NC, and from $ 1,300 to $ 2,765 in Durham, NC. Even the highest estimate in these ranges is significantly lower than the estimate from the focus group meeting. These fees represent approximately 1 to 2 percent of the final sale price of a house in the area.

In a cost breakdown of a single family home provided by NAHB on their website, 34 impact fees were estimated at $ 1,182 per unit ( approximately 1 percent of total construction cost) . A study by the Sierra Club ( Sierra Club 2000) estimates that impact fees range from under $ 1,000 per unit to approximately $ 6,140 per single family unit. These figures are based on local observations. Finally,

Ross and Thorpe ( 1992) report that a survey conducted in 1990 in Orange County, California ( one of the most expensive housing markets in the country) , found at least three cities in that county with impact fees exceeding $ 20,000 per unit. This estimate is closest to the assumption currently in the models.

At this time, EPA is unaware of any single national estimate for the average impact fee imposed on developers and builders and has chosen to use the NAHB estimate for this analysis.

Building Construction Costs The approach used in the model project for estimating average building construction costs for the single family project is to take total construction costs for a new single family house, provided by NAHB on their website ( $ 124,276) ( NAHB 2001b) , and divide that figure by the average square footage of a new, conventionally financed, house as reported by Census ( 2,310 square feet; Characteristics of New Housing) . This calculation yields an average construction cost of $ 53.80 per square foot. NAHB focus group participants estimated that building construction costs ranged from $ 50 to $ 75 per square foot, at least in the Chicago area. The national estimate is within the range provided by NAHB members at the focus group meeting.

34 http: / / www. nahb. com/ housing_ issues/ balance_ 2. htm 4B 2 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Building construction costs for the remaining projects   multifamily, , commercial, and industrial   were taken from R. . S. Means Building Construction Cost Data . The costs used were median costs for the   typical   sized building for each project type, , based on the projects detailed in the R. S. Means project database. While the building costs may fluctuate some with overall building size, the median cost was used as a proxy for national level building costs and was used regardless of site or building size.

Building size for these three project types was assumed to fluctuate with site size. Size estimates for each site size were determined using the building to site area ratio from the Center for Watershed Protection.

Multiplying this ratio by each site size ( 1, 3, 7.5, etc. acres) gave EPA an estimate of building footprint.

Since multifamily building construction costs were based on low rise apartment buildings 1 to 3 stories in height, an average of 2 stories per apartment building was used to calculate total building square footage from the footprint. Commercial and industrial buildings were assumed to be 1 story; therefore the building footprint equaled total building area.

Impervious Surface Estimates Estimates for impervious surface area and construction costs were calculated for the multifamily,

commercial, and industrial model projects. The impervious surface area for roads, driveways, parking,

and sidewalks was calculated by multiplying the impervious surface area to site size ratio ( CWP 2001) by the site size. R. S. Means cost estimates for paving and sidewalk construction were used to estimate impervious surface construction costs. The paving cost estimate ( $ 1.44 per square foot) was multiplied by the combined surface area for roads, driveways, and parking while the sidewalk cost estimate ( $ 4.66 per square foot) could be directly multiplied to the sidewalk surface area estimate.

Financing Requirements A December 28, 1999, memo from ERG to EPA (   Real Estate Development Financing   ) cites the typical land acquisition loan duration is 2 years, whereas the models currently use a duration of 3 years. It is not clear if the 2 year loan term includes the same activities as assumed for the model projects. Similarly, the duration for the land development loan is cited as approximately 2 years ( comparable to that for the land acquisition loan) . The average duration of the construction loan is not cited in the memo, although it may be assumed that the duration of the loan would vary with project size.

4B 3 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Loan to value ratios under the Real Estate Lending Rules declined from approximately 80 percent for all phases of project development to the following breakdown after the Savings and Loan Crisis:

  65 percent for land acquisition   75 percent for land development   80 percent for construction The memo also states that the typical land acquisition loan rate is 1 4 points above the prime rate.

No further detail for the remaining project stages is given, but they are assumed to be within the same range. The models currently use a loan rate of 7.5 percent.

Profit Assumptions Profit on both land development and building construction are assumed to be 10 percent, based on conversations with NAHB and reality checked against the assumptions used in the R. S. Means Cost Data series. Note that there would not be a separate profit for the land development phase of the project because the developer builder would retain ownership of the project through building construction ( land development profit is only realized when a developer sells finished lots to individual builders) . The profit rate with 100 percent CPT is based on the assumption that any additional costs incurred by the developer

builder ( i. e. , additional storm water control costs) would be passed through to the consumer, and that none of the additional costs would be borne by the developer builder as decreased profit. The profit rate with zero CPT depends on the level of costs.

Overhead Assumptions EPA assumes that developers apply an overhead charge to all costs incurred during the land development phase, and that a further overhead charge is levied by the builder on all costs incurred during the building phase, including the cost of lot acquisition. These overhead charges represent, in part,

payment to the owner for capital tied up to secure development and construction loans as well as compensation for managing and overseeing the work of subcontractors and other professionals ( engineers,

architects, designers) .

4B 4 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 The estimated overhead rate of 10 percent at the development stage and 10 percent at the building phase was based on input from NAHB. EPA has separately calculated the   opportunity cost of capital   based on actual financing needs, loan conditions, and loan terms. In the model projects, therefore, the actual percentage applied as an overhead factor has been adjusted downwards.

4B 5 APPENDIX 4C Characteristics of Model Establishments Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 4C 1. Model Establishment Characteristics Based on Census Data [ 1 ]

Class Number of Establishments Average Starts Average Revenue Average Employment Cashflow 1 4 17,107 2. 3 $ 492. 2 2. 5 $ 46.3 Single 5 9 7,589 6. 4 $ 1,088. 6 3. 3 $ 104.9 Family 10 24 6,262 14. 6 $ 1,987. 0 4. 3 $ 177.3 25 99 3,018 41. 9 $ 4,923. 5 8. 6 $ 4,229.0 100 499 833 191. 7 $ 24,030. 7 32. 1 $ 2,187.6 500+ 122 864. 5 $ 109,032. 6 160. 0 $ 9,192.5 2 9 486 4. 3 $ 644. 8 3. 2 $ 29.4 Multifamily 10 24 398 16. 5 $ 1,381. 6 5. 1 $ 99.6 25 99 383 55. 1 $ 3,499. 7 8. 0 $ 320.1 100 499 593 191. 7 $ 7,410. 0 13. 5 $ 566.6 500+ 39 959. 0 $ 43,844. 4 64. 7 $ 938.8 Commercial 50 99 41,356 13.2 $ 23,799 67. 5 $ 927.5 Industrial 50 99 8,042 9.5 $ 18,470 67. 7 $ 627.3 [ 1 ] Dollar values in thousands 4C 1         Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 4C 2 Model Establishment Characteristics Based on Dun And Bradstreet Data Single Family ( SIC 1531) Multifamily ( SIC 1522) Commercial ( SIC 1542) Industrial ( SIC 1541) Line Item S caled Value [ 1 ] Percent S caled Value [ 1 ] Percent S caled Value [ 1 ] Percent S caled Value [ 1 ] Percent Cash $ 82,22 9 11.9 % $ 55,75 2 18.4 % $ 61,70 5 21.5 % $ 57,68 2 19.1%

A cco unts Receiv a ble $ 61,49 9 8.9 % $ 81,20 4 26.8 % $ 101,59 8 35.4 % $ 108,11 6 35.8%

Notes Receiv a ble $ 4,83 7 0 .7 % $ 3,93 9 1 .3 % $ 2,00 9 0 .7 % $ 2,71 8 0.9%

Inventory $ 210,06 4 30.4 % $ 12,72 6 4.2 % $ 5,74 0 2.0 % $ 4,53 0 1.5%

Other Current $ 152,71 1 22.1 % $ 67,56 9 22.3 % $ 60,27 0 21.0 % $ 58,58 8 19.4%

Total Current Assets $ 511,34 0 7 4 . 0 % $ 221,19 0 7 3 . 0 % $ 231,32 2 8 0 . 6 % $ 231,63 4 7 6 . 7%

Fix ed A ssets $ 109,17 8 15.8 % $ 58,17 6 19.2 % $ 41,04 1 14.3 % $ 52,24 6 17.3%

Other Non current $ 70,48 2 10.2 % $ 23,63 4 7.8 % $ 14,63 7 5.1 % $ 18,12 0 6.0%

Total Asset s $ 691,00 0 1 0 0 .0 % $ 303,00 0 1 0 0 .0 % $ 287,00 0 1 0 0 .0 % $ 3 0 2 ,0 0 0 100.0%

A cco unts Paya ble $ 56,66 2 8.2 % $ 73,02 3 24.1 % $ 87,24 8 30.4 % $ 79,12 4 26.2%

Bank Loans $ 11,74 7 1.7 % $ 2,42 4 0.8 % $ 1,43 5 0.5 % $ 6 0 4 0.2%

Notes Paya ble $ 101,57 7 14.7 % $ 18,48 3 6.1 % $ 6,88 8 2.4 % $ 7,24 8 2.4%

Other Current $ 196,93 5 28.5 % $ 102,41 4 33.8 % $ 52,52 1 18.3 % $ 57,98 4 19.2%

Total Current Liabilities $ 366,92 1 5 3 . 1 % $ 196,34 4 6 4 . 8 % $ 148,09 2 5 1 . 6 % $ 144,96 0 4 8 . 0%

Other Long Term $ 81,53 8 11.8 % $ 29,99 7 9.9 % $ 15,49 8 5.4 % $ 22,34 8 7.4%

Deferred Credit s $ 5,52 8 0 .8 % $ 1,21 2 0 .4 % $ 57 4 0 .2 % $ 30 2 0.1%

Net W orth $ 237,01 3 34.3 % $ 75,44 7 24.9 % $ 122,83 6 42.8 % $ 134,39 0 44.5%

Total Liabilities & Net W orth $ 691,00 0 1 0 0 .0 % $ 303,00 0 1 0 0 .0 % $ 287,00 0 1 0 0 .0 % $ 3 0 2 ,0 0 0 100.0%

Ne t Sales $ 1,000,000 100.0% $ 1,000,000 100.0% $ 1,000,000 100.0% $ 1,000,000 100.0%

Gross Profit $ 228,00 0 22.8 % $ 190,00 0 19.0 % $ 159,00 0 15.9 % $ 184,00 0 18.4%

Net Profit A fter Tax $ 12,00 0 1.2 % $ 35,00 0 3.5 % $ 30,00 0 3.0 % $ 34,00 0 3.4%

W orking Capital $ 144,419 $ 24,846 $ 83,230 $ 86,674 Gross P rofit Ratio 0.22 8 0.19 0 0.15 9 0.184 Ret urn on Net W orth Ratio 0.05 1 0.46 4 0.24 4 0.253 Current Ratio 1.39 4 1.12 7 1.56 2 1.598 Debt t o E quit y Ratio 1.91 5 3.01 6 1.33 6 1.247 [ 1 ] Values scaled according to $ $ 1, 000,000 net sales for comparative purposes 4C 2 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 4C 3 Financial Ratio Data by Quartile Uppe r Low e r S e ctor Ra ti o Q u a r t i l e Me dia n Q u a r t i l e Current 2 . 9 0 0 1 . 4 0 0 1 . 1 0 0 S i n g l e Family De bt t o E quit y 0 . 7 2 4 1 . 7 9 6 4 . 9 2 8 Ret urn on Ne t W o rth 0 . 3 3 5 0 . 1 6 8 0 . 0 6 6 Current 2 . 5 0 0 1 . 5 0 0 1 . 1 0 0 Mul tifamily De bt t o E quit y 0 . 5 9 5 1 . 2 8 0 3 . 1 7 9 Ret urn on Ne t W o rth 0 . 5 8 9 0 . 2 2 7 0 . 0 6 1 Current 2 . 2 0 0 1 . 5 0 0 1 . 2 0 0 Commer ci a l De bt t o E quit y 0 . 6 6 0 1 . 4 5 6 2 . 8 2 3 Ret urn on Ne t W o rth 0 . 3 6 9 0 . 1 6 4 0 . 0 5 5 Current 2 . 5 0 0 1 . 6 0 0 1 . 2 0 0 Industrial De bt t o E quit y 0 . 5 2 7 1 . 3 0 0 2 . 7 2 3 Ret urn on Ne t W o rth 0 . 3 8 6 0 . 1 5 1 0 . 0 5 5 4C 3 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 CHAPTER FIVE ECONOMIC IMPACT ANALYSIS RESULTS 5.1 OVERVIEW OF ECONOMIC IMPACT ANALYSIS METHODOLOGY This chapter presents the projected economic impacts of the regulatory options discussed in Chapter Three on the construction and development ( C& D) industry. In this chapter, EPA evaluates the impacts of these costs using the methodology, models, data, and approaches described in Chapter Four.

The economic impact methodology uses several methods to assess economic impacts on the industry. These include models that analyze impacts at the level of the individual construction project,

individual firm, national construction market, and the economy as a whole. The analysis considers impacts on C& D firms that would be complying with the regulations. It also considers the impacts on those who purchase the output of the C& D industry, including prospective new home buyers; owners of new multifamily, commercial, and industrial properties; and public entities responsible for building roads, schools, and other public facilities.

The chapter is organized as follows:

  Section 5.2 presents EPA   s analysis of the economic impacts of the proposed rule on model C& D projects. These results are based on the financial analyses developed for representative projects in Chapter Four.

  Section 5.3 presents EPA   s estimates of the national costs of the proposed rule. EPA determined those costs by multiplying the per acre compliance costs by estimates of the number of acres subject to the proposed effluent guidelines annually.

  Section 5.4 presents the results of EPA   s analysis of the impacts of the proposed rule on model C& D establishments. This section examines the impact of the incremental compliance requirements on the financial condition of representative establishments, using data on their present financial condition as a starting point.

  Section 5.5 presents EPA   s analysis of closures and employment losses. These impacts are based on the model establishment described in Section 5.4.

5 1 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002   Section 5.6 presents EPA   s analysis of the proposed rule   s impacts on barriers to entry   that is, how the incremental costs of the proposed rule could affect the ability of new businesses to enter the market.

  Section 5.7 presents EPA   s market model analysis. This section considers the impact of the incremental compliance requirements on national construction markets and the economy as a whole.

  Section 5.8 presents EPA   s analysis of potential impacts on government units. This section considers the various costs to government associated with the proposed rule.

  Section 5.9 presents EPA   s analysis of additional impacts of the proposed rule. This section discusses regional impacts, social costs, and unfunded mandates.

5. 2 ANALYSIS OF IMPACTS ON MODEL PROJECTS Chapter Four defines a series of model projects. In this section, EPA uses those models to analyze the impact of the proposed rule on two alternative targets: the developer builder ( assuming that they absorb the incremental costs) and the consumer ( assuming that the same costs are passed on to the buyer) . EPA has developed model projects for each of the following:

  A residential development of single family homes   A residential development of multifamily housing units   A commercial development ( enclosed shopping center)

  An industrial development ( industrial park)

For each type of model project, EPA has analyzed costs and impacts for a range of project sizes:

1, 3, 7.5, 25, 70, and 200 acres. The model projects incorporate all of the baseline costs associated with developing a site and completing construction of all housing units or buildings on the site. Accordingly, it is assumed that the baseline costs include the costs of complying with existing Phase I and Phase II NPDES storm water regulations as they would apply to the site. The model then allows EPA to assess the incremental impact of additional requirements imposed under the proposed rule. Chapter Four 5 2 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 provides a detailed description of the model project characteristics, assumptions, and data sources,

including an itemized listing of project cost elements.

5.2.1 Cost Pass Through Considerations The model projects are calibrated to allow analysis under varying assumptions about the degree of cost pass through ( CPT) from the builder developer to the buyer. 1 Costs for the models have been estimated under two extreme assumptions, 100 percent CPT and zero CPT. Under 100 percent CPT, all incremental regulatory costs resulting from the proposed rule are passed through to end consumers.

Under this approach, the costs are also assumed to be marked up to the same degree as any other project costs. 2 Consumers feel the impact of the regulations in the form of a higher price for each new building or housing unit. With zero CPT, the incremental regulatory costs are assumed to accrue entirely to the builder developer, and appear as a reduction in profits. EPA determines this reduction by fixing the final sales price of the housing units and calculating the builder   s profit once the regulatory costs are absorbed.

Existing literature and industry information suggests that, in the important single family home market, at least, pass through of regulatory costs in the new housing market is close to 100 percent ( e. g. ,

Luger and Temkin, 2000) , but the actual incidence of regulatory costs would depend closely on local market conditions. To illustrate the range of possible impacts, EPA has calculated its models under the extreme conditions of 100 percent and zero percent CPT. Accordingly, for each sector modeled there are two sets of results reported below.

5.2.2 Model Project Baseline Performance Under the baseline assumptions and conditions, the sales price for each housing unit ( or model commercial or industrial building) is calculated, and the baseline builder developer profit level is 1 Cost pass back to the landowner is possible, but it occurs infrequently. See Section 4.1.2. Since EPA lacks data on the actual incidence and extent of cost pass back, it is not analyzed in detail.

2 The cost markup assumptions are built into the model and are explained in Chapter Four.

5 3 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 determined based on the sales price. Builder developer pre tax profit is assumed to be approximately 10 percent of the building sales price. Table 5 1 shows the baseline sales price and profit for each model project type and each project size. Data and assumptions underlying these estimates are derived in Chapter Four. The model results presented later in this section show changes from these baseline values under each regulatory option.

Table 5 1. Baseline Sales Price and Profit Conditions for the Model Projects Project Type and Size ( acres) Calculated Building Sales Price Builder Developer Pre tax Profit Single Family Residential 1 acre $ 279,903 $ 27,990 3 acres $ 283,093 $ 24,251 7.5 acres $ 283,093 $ 28,309 25 acres $ 282,951 $ 28,295 70 acres $ 283,042 $ 28,304 200 acres $ 283,058 $ 28,306 Multifamily Residential 1 acre $ 1,375,074 $ 137,507 3 acres $ 4,125,374 $ 412,537 7.5 acres $ 10,313,438 $ 1,031,344 25 acres $ 34,378,235 $ 3,437,823 70 acres $ 96,259,030 $ 9,625,903 200 acres $ 275,025,887 $ 27,502,589 Commercial 1 acre $ 1,498,800 $ 149,880 3 acres $ 4,496,399 $ 449,640 7.5 acres $ 11,240,999 $ 1,124,100 25 acres $ 37,469,920 $ 3,746,992 70 acres $ 104,915,760 $ 10,491,576 200 acres $ 299,759,358 $ 29,975,936 Industrial 1 acre $ 950,949 $ 95,095 3 acres $ 2,852,899 $ 285,290 7.5 acres $ 7,132,197 $ 713,220 25 acres $ 23,773,989 $ 2,377,399 70 acres $ 66,567,119 $ 6,656,712 200 acres $ 190,191,761 $ 19,019,176 Source: EPA estimates based on the methodologies presented in Chapter Four.

5 4 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 5.2.3 Results of Model Project Analyses Table 5 2a contains the results under the 100 percent CPT assumption, while Table 5 2b contains identical results under the assumption of zero CPT. In Table 5 2a ( 100 percent CPT) , the impacts of the regulatory options are shown as the percentage increase in the sales price of each model project unit. In Table 5 2b ( zero CPT) , the impacts of the regulatory options are shown as the percentage decrease in builder profits.

100 Percent Cost Pass Through Under the 100 percent CPT assumption, the impacts range from a minimum of 0.00 percent ( i. e. ,

there is no incremental impact on sales price) for all project types to a range of maximum impact values ( where the percent listed indicates an increase in sales price of that amount) : 0.09 percent for single family residential, 0.05 percent for multifamily residential, 0.05 percent for commercial, and 0.07 percent for industrial. All of the maximum impacts occur under Option 2.

Zero Cost Pass Through Under the zero CPT assumption, the impacts range from a minimum of 0.00 percent for all project types under various option combinations ( indicating no impact to builder profit) to a range of maximum impact values, all under one percent. Maximum impacts all occur with Option 2 as shown below:

  Single family residential:  0.80 percent   Multifamily residential:  0.45 percent   Commercial:  0.41 percent   Industrial:  0.64 percent 5 5 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 5 2a. Impact of Regulatory Options on Model Project Financials   100 Percent Cost Pass Through, All Project Sizes Option Percent Change in Project Price to Buyer Single Family Multifamily Commercial Industrial Min Max Min Max Min Max Min Max 1 0.00% 0.04% 0.00% 0.02% 0.00% 0.02% 0.00% 0.03%

2 0.00% 0.09% 0.00% 0.05% 0.00% 0.05% 0.00% 0.07%

3 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Source: EPA estimates based on the methodologies presented in Chapter Four.

Table 5 2b. Impact of Regulatory Options on Model Project Financials   Zero Percent Cost Pass Through, All Project Sizes Option Percent Change in Builder Developer Profit Single Family Multifamily Commercial Industrial Min Max Min Max Min Max Min Max 1 0.00%  0.37% 0.00%  0.19% 0.00%  0.17% 0.00%  0.27%

2 0.00%  0.80% 0.00%  0.45% 0.00%  0.41% 0.00%  0.64%

3 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Source: EPA estimates based on the methodologies presented in Chapter Four.

5.2.4 Nonbuilding Project Analysis Results This section presents the results of the model nonbuilding project analysis described in Section 4.2.7. As indicated in that section, EPA has not developed actual engineering costs for projects such as roads and highways. As a result, EPA has simulated the impact of the proposed rule on such projects using worst case ( i. e. , highest) estimates of the per acre engineering costs estimated for building projects.

Due to the lack of engineering costs for this project type, EPA used a   worst case   assumption of $ 378 per acre in compliance costs. This figure is based on the highest per acre compliance cost 5 6 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 estimated for a 7.5 acre building project. EPA elected to use the compliance costs for a 7.5 acre project because the model one mile new highway construction project encompasses 10.67 acres. EPA estimates that the baseline costs of construction for one mile of typical road or highway is $ 5.4 million ( see Section 4.2.7) . Using $ 378 per acre, the worst case estimate of compliance costs associated with one mile of new road or highway construction ( 10.67 acres) is $ 4,033. This equates to less than 0.1 percent of baseline costs, indicating even under worst case assumptions regarding compliance costs, the proposed rule is unlikely to have a significant impact on representative nonbuilding construction projects.

5.3 ANALYSIS OF NATIONAL COMPLIANCE COSTS EPA has calculated the national compliance costs associated with the proposed rule by multiplying the compliance costs per acre ( by project type and size) by estimates of the number of acres developed per year. EPA used data from the USDA National Resources Inventory ( NRI) to estimate the number of acres developed per year. According to this source, approximately 2.2 million acres of undeveloped land are converted to a developed state every year. EPA has adjusted this total to account for waivers and differences in regulatory coverage between Option 1 and Option 2. 3 As described in Chapter Four, both the 14 Community Study ( conducted in support of the Phase II NPDES storm water rule development) and building permits data from Census were used to allocate the developed acreage by project type and size.

Table 5 3 contains EPA   s estimates of the national costs of the regulatory options. The national costs of the proposed rule range from $ 0.00 for each project type ( Option 3) to a maximum of $ 121.5 million for single family residential construction, $ 59.4 million for multifamily residential construction,

$ 277.3 million for commercial construction, and $ 11.0 million for industrial construction ( all Option 2) .

The combined national compliance costs across all sectors are shown in the final rows of Table 5 3a. The national compliance costs under Option 1 are $ 118.1 million while the national compliance costs under Option 2 are $ 469.2 million.

3 Option 1 applies to sites of one acre or more in size while Option 2 applies to sites of five acres or more in size.

5 7

  Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 5 3a. Estimated National Cost of Storm Water Control Options ( All Dollar Amounts in Constant, Pre tax, 1997 Dollars)

Option Compliance Costs per Acre( $ ) Estimated National Costs ( $ Millions)

Single Family Residential Option 1 $ 57.0 $ 24.1 Option 2 $ 305.0 $ 121.5 Option 3 $ 0.0 $ 0.0 Multifamily Residential Option 1 $ 59.0 $ 11.9 Option 2 $ 319.0 $ 59.4 Option 3 $ 0.0 $ 0.0 Commercial Option 1 $ 74.0 $ 78.4 Option 2 $ 312.0 $ 277.3 Option 3 $ 0.0 $ 0.0 Industrial Option 1 $ 81.0 $ 3.7 Option 2 $ 303.0 $ 11.0 Option 3 $ 0.0 $ 0.0 Total Option 1 $ 118.1 Option 2 $ 469.2 Option 3 $ 0.0 NOTE: Compliance costs per acre are weighted national averages for each option over all site size classes. Source: EPA estimates based on the methodologies presented in Chapter Four.

5 8 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 5 3b. Calculation of Total Cost per Unit ( All Dollar Amounts Are in Constant, Pre tax, 1997 Dollars)

Single Multi Family Commercial Industrial Total Option 1 Total Costs $ 24,099,340 $ 11,892,936 $ 78,415,033 $ 3,733,824 $ 118,141,133 Total Acres 533,878 252,182 1,332,476 57,523 2,176,058 Cost per Acre $ 45.14 $ 47.16 $ 58.85 $ 64.91 Units per Acre 2.67 13,591 8,320 8,555 Cost per Unit $ 16.91/ house $ 0.003/ sq ft $ 0.007/ sq ft $ 0.008/ sq ft Option 2 Total Costs $ 121,470,785 $ 59,391,699 $ 277,280,636 $ 11,016,368 $ 469,159,488 Total Acres 501,100 229,958 1,061,108 42,733 1,834,898 Cost per Acre $ 242.41 $ 258.27 $ 261.31 $ 257.80 Units per Acre 2.67 13,591 8,320 8,555 Cost per Unit $ 90.79/ house $ 0.019/ sq ft $ 0.031/ sq ft $ 0.030/ sq ft Source: EPA estimates based on the methodologies presented in Chapter Four.

Table 5 3b shows the calculation of cost per unit for Options 1 and 2. Units are   dollars per house   for single  family residential construction and   dollars per square foot   for all other categories. .

Total costs are the estimated national costs as shown in Table 5 3a. Option 2 applies only to sites disturbing 5 acres or more, so this option encompasses less acreage than Option 1. In addition, several states have enacted regulations equivalent to the proposed standards and so would not incur incremental costs from the proposed rule. These equivalent states are included in the storm water control costs per acre in Table 5 3a but removed in the estimated national costs in the same table. Table 5 3b recalculates the cost per acre with the costs attributable to states with equivalent programs removed. With this adjustment, the cost per unit is calculated by dividing by the number of houses per acre, or number of rentable square feet per acre, which is derived from Census and R. S. Means data.

The cost to build a new single family home increases by $ 17 under Option 1 and $ 91 under Option 2. Costs per square foot increase by less than 1 cent for Option 1 and 2 to 3 cents for Option 2.

The impacts of these cost increases on the markets for new construction are explored in Section 5.7.

5 9 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 5.4 ANALYSIS OF IMPACTS ON MODEL ESTABLISHMENTS As described in Chapter Four, EPA developed a set of representative model projects as one basis for analyzing the impacts of the proposed rule on the construction industry. EPA has examined the impacts of the compliance costs associated with these model projects on a series of model establishments that characterize the financial conditions of   typical   businesses in each of the four major industry sectors ( single family residential, multifamily residential, commercial, and industrial; see Section 4.3) .

The model firm analysis simulates the impact of the incremental compliance costs on the balance sheet and cash flow of the model establishments, and expresses the impacts in terms of changes in meaningful business financial ratios. The ratios used in the analysis include:

  Gross profit ratio   Return on net worth   Current ratio   Debt to equity ratio These ratios are reviewed in Chapter Four, which also presents a discussion of their significance as indicators of financial performance.

5. 4 . 1 Building Construction This section presents the results of simulations of firm performance under the regulatory options being considered by EPA. As indicated in Chapter Four, the simulations have been run under two CPT scenarios: ( 1) zero CPT from the developer builder to the consumer and ( 2) an estimated actual CPT,

where a   realistic   share of the compliance costs are passed though to consumers in the form of higher prices. EPA has estimated a separate CPT factor for each market sector individually. The zero CPT results presented in this section represents the   worst case   scenario; ; impacts under the more realistic CPT assumption are much smaller than those shown below.

5 10 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 5 4 shows sample results for a firm in the single family residential construction industry ( SIC 1531) completing between 10 and 24 housing starts per year, based on costs for 7.5 acre projects.

Impacts are most severe on the return on net worth ratio, a recurring outcome throughout EPA   s model firm analysis. Return on net worth is the most sensitive ratio because it is based on net profit after taxes,

which makes up 1.2 percent of revenues for the   typical   establishment in SIC 1531 according to D& & B data. Impacts are much less severe under the other financial ratio measures.

Table 5 5a provides a summary of the results for each sector by regulatory option, over all project sizes and under the zero CPT scenario. The results are broadly similar to the detailed example presented in Table 5 4 for the single family residential sector. Table 5 5b provides the same summary of financial ratios under the estimated actual cost pass through scenario. In both scenarios the most severe impacts are observed when measured by impact on return on net worth, followed by the gross profit, debt to equity, and current ratios. The largest impact over both scenarios is a 5.85 percent decline in the return on net worth ratio for the single family residential sector under Option 2 with zero CPT. With the exception of return on net worth, the remainder of the results under zero CPT are at or below 1.0 percent for all project types. The results under the estimated actual CPT scenario indicate impacts of less than 1.0 percent for all financial ratios and all four project types, with most of the impacts being less than 0.10 percent ( with the exception of return on net worth) .

5 11

  Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 5 4 Impact of Regulatory Options on Financial Performance for Model Firm Single family Residential Construction, 10 24 Housing Units Starts Class Impact Regulatory Option Option 1 Option 2 Option 3 Cost Impact Incremental Costs per Acre Per Year $ 64 $ 371 $ 0 Incremental Costs per Establishment Per Year $ 354 $ 2,034 $ 0 Impact on Financial Performance Gross Profit Ratio Percent change from baseline 0.2278%

 0.0780% 0.2270%

 0.4490% 0.2280%

Return on Net Worth Percent change from baseline 0.0502%

 0.8810% 0.0481%

 5.0680% 0.0506%

Current Ratio Percent change from baseline 1.3935%

 0.0070% 1.3930%

 0.0400% 1.3936%

Debt to Equity Ratio Percent change from baseline 1.9161%

0.0310% 1.9189%

0.1800% 1.9155%

Source: EPA estimates based on the methodologies presented in Chapter Four.

5 12 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 5 5a. Impact of Regulatory Options on Model Firm Financial Performance Zero Cost Pass Through Construction Industry and Regulatory Option Percent Change in Financial Ratios, From Baseline a Gross Profit Return on Net Worth Current Ratio Debt to Equity Min. Max. Min. Max. Min. Max. Min. Max.

Single family residential Option 1 0.000%  0.230% 0.000%  2.540% 0.000%  0.020% 0.000% 0.900%

Option 2 0.000%  0.520% 0.000%  5.850% 0.000%  0.050% 0.000% 0.210%

Option 3 0.000% 0.000% 0.000% 0.000% 0.000% 0.000% 0.000% 0.000%

Multifamily residential Option 1 0.000%  0.310% 0.000%  0.990% 0.000%  0.050% 0.000% 0.200%

Option 2 0.000%  0.950% 0.000%  3.070% 0.000%  0.160% 0.000% 0.640%

Option 3 0.000% 0.000% 0.000% 0.000% 0.000% 0.000% 0.000% 0.000%

Commercial Option 1 0.000%  0.170% 0.000%  0.530% 0.000%  0.020% 0.000% 0.130%

Option 2 0.000%  0.400% 0.000%  1.250% 0.000%  0.050% 0.000% 0.310%

Option 3 0.000% 0.000% 0.000% 0.000% 0.000% 0.000% 0.000% 0.000%

Industrial Option 1 0.000%  0.140% 0.000%  0.430% 0.000%  0.020% 0.000% 0.120%

Option 2 0.000%  0.320% 0.000%  1.020% 0.000%  0.050% 0.000% 0.280%

Option 3 0.000% 0.000% 0.000% 0.000% 0.000% 0.000% 0.000% 0.000%

a Ranges ( minimum and maximum) reflect results across model firms of varying sizes. Source: EPA estimates based on the methodologies presented in Chapter Four.

5 13 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 5 5b. Impact of Regulatory Options on Model Firm Financial Performance Estimated Actual Cost Pass Through Construction Industry and Regulatory Option Percent Change in Financial Ratios, From Baseline a Gross Profit Return on Net Worth Current Ratio Debt to Equity Min. Max. Min. Max. Min. Max. Min. Max.

Single family residential Option 1 0.000%  0.034% 0.000%  0.379% 0.000%  0.003% 0.000% 0.013%

Option 2 0.000%  0.077% 0.000%  0.872% 0.000%  0.007% 0.000% 0.031%

Option 3 0.000% 0.000% 0.000% 0.000% 0.000% 0.000% 0.000% 0.000%

Multifamily residential Option 1 0.000%  0.026% 0.000%  0.083% 0.000%  0.004% 0.000% 0.017%

Option 2 0.000%  0.080% 0.000%  0.259% 0.000%  0.014% 0.000% 0.054%

Option 3 0.000% 0.000% 0.000% 0.000% 0.000% 0.000% 0.000% 0.000%

Commercial Option 1 0.000%  0.017% 0.000%  0.054% 0.000%  0.002% 0.000% 0.013%

Option 2 0.000%  0.040% 0.000%  0.126% 0.000%  0.006% 0.000% 0.031%

Option 3 0.000% 0.000% 0.000% 0.000% 0.000% 0.000% 0.000% 0.000%

Industrial Option 1 0.000%  0.021% 0.000%  0.066% 0.000%  0.003% 0.000% 0.018%

Option 2 0.000%  0.048% 0.000%  0.155% 0.000%  0.008% 0.000% 0.042%

Option 3 0.000% 0.000% 0.000% 0.000% 0.000% 0.000% 0.000% 0.000%

a EPA applied the following estimated cost pass through factors: Single family residential, 85.10% ; Multifamily residential, 91.55% ; Commercial, 89.87% ; Industrial, 84.75% . b Ranges ( minimum and maximum) reflect results across model firms of varying sizes. Source: EPA estimates based on the methodologies presented in Chapter Four.

5.4.2 Nonbuilding Construction EPA has analyzed the potential impacts of the proposed rule on nonbuilding construction establishments based on Census data and the cost data presented in Section 5.2.4. As previously discussed, this analysis focuses on highway and street construction contractors ( NAICS 23411) due to the lack of financial data for other segments of the heavy construction industry group ( NAICS 234) .

5 14 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 The model establishment analysis for heavy construction, although somewhat simplified, follows the basic methodology outlined in Section 4.3 for establishments in the commercial and industrial construction industries. EPA has determined that the median highway construction establishment ( NAICS 23411) , based on revenues, is in the 50 to 99 employee size classification category as defined by Census ( U. S. Census 2000) . Within this employment size class, EPA calculated average establishment revenues, employment, and costs as discussed in Section <IP_ADDRESS>.

For the model establishment, EPA examined the economic impacts of the worst case compliance cost impacts on the same four financial ratios analyzed above for the residential, commercial, and industrial construction industries. Due to the lack of actual engineering cost estimates for highway construction, the compliance costs used in this analysis do not correspond to a particular regulatory option or combination of options. Compliance costs for 7.5 acre projects were chosen for this analysis because they are closest in size to the model highway construction project assumed to be undertaken by the model establishment, which encompasses 10.67 acres.

Table 5 6 shows the results of this analysis for the model highway construction firm ( 50 99 employment size class) . Overall, the impacts are not large, with only one estimate above one quarter of one percent. As with the model establishments in the building construction industries, the impacts are largest for the return on net worth ratio.

5 15

        Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 5 6. Impact of Proposed Rule on Model Firm Financials  Highway Construction Cost Pass Through Assumption Gross Profit Return on Net Worth Current Debt to Equity Ratio Percent Change from Baseline Ratio Percent Change from Baseline Ratio Percent Change from Baseline Ratio Percent Change from Baseline Zero Cost Pass Through Baseline 0.223000 0.198344 1.629629 1.061856 Worst Case 0.222256  0.33% 0.196307  1.03% 1.628681  0.06% 1.064601 0.26%

90 Percent Cost Pass Through Baseline 0.223000 0.198344 1.629629 1.061856 Worst Case 0.222926  0.03% 0.198141  0.10% 1.629534  0.01% 1.062131 0.03%

Source: EPA estimates based on the methodologies presented in Chapter Four.

Under a zero cost pass through ( CPT) assumption, the largest impact is on return on net worth,

which declines by just over 1.0 percent. Impacts under an estimated CPT value of 90 percent are all at or below 0.10 percent.

5.5 ANALYSIS OF IMPACTS ON CLOSURES AND EMPLOYMENT LOSSES As discussed in Chapter Four, EPA used two approaches to estimate potential facility closures and employment losses resulting from the proposed rule. The primary approach was to analyze changes in key financial ratios that occur as firms   costs increase in response to the proposed rule. . To estimate closures, EPA examined a weighted average of changes in the current ratio, debt to equity ratio, and return on net worth ratios. EPA then constructed a cumulative distribution function for each ratio to estimate the percent of establishments that would likely fall below   critical   values after incurring compliance costs. That percent falling below this critical value, multiplied by the number of facilities represented by the model under evaluation, resulted in a projected number of closures. Employment losses were calculated by multiplying the number of establishments projected to close by employment estimates for the model facility representing those closures.

5 16 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 EPA   s alternative approach, which analyzed estimated model facility cash flow, was used as a check on the financial ratio analysis described above. Results from this analysis are contained in Appendix 5 A.

5.5.1 Facility Closures Table 5 7a shows closure analysis results using the financial ratio method under a zero CPT assumption   the worst case scenario. . Results under a calculated CPT assumption are presented in Table 5 7b. The largest number of establishment closures is projected to occur in the commercial sector ( 43 projected closures) , followed by the single family residential sector ( 13 closures) . Facility closures as a percent of total facilities are less than one percent under all proposed options and for all industry sectors. As seen in Table 5 7b, closure impacts are even smaller when CPT is accounted for.

Table 5 7a. Estimated Facility Closures Zero Cost Pass Through Option Single Family Multifamily Commercial Number Pct. of Total Number Pct. of Total Number Pct. of Total 1 4 0.005% 1 0.022% 11 0.028%

2 13 0.015% 3 0.065% 43 0.108%

3 0 0.000% 0 0.000% 0 0.000%

Option Industrial Heavy TOTAL Number Pct. of Total Number Pct. of Total Number Pct. of Total 1 2 0.026% 0 0.000% 18 0.012%

2 7 0.090% 26 0.230% 92 0.063%

3 0 0.000% 0 0.000% 0 0.000%

Source: EPA estimates based on the methodologies presented in Chapter Four.

5 17 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 5 7b. Estimated Facility Closures Estimated Cost Pass Through Option Single Family Multifamily Commercial Number Pct. of Total Number Pct. of Total Number Pct. of Total 1 1 0.001% 0 0.000% 1 0.003%

2 2 0.002% 0 0.000% 4 0.010%

3 0 0.000% 0 0.000% 0 0.000%

Option Industrial Heavy TOTAL Number Pct. of Total Number Pct. of Total Number Pct. of Total 1 0 0.000% 0 0.000% 2 0.001%

2 1 0.013% 3 0.027% 10 0.007%

3 0 0.000% 0 0.000% 0 0.000%

Source: EPA estimates based on the methodologies presented in Chapter Four.

5.5.2 Employment Losses Table 5 8a presents employment loss analysis results for the financial ratio method under a zero CPT assumption to show the worst case scenario. Results under a calculated CPT assumption are presented in Table 5 8b.

Employment impacts as a percent of each sector   s total employment are roughly the same as closure impacts. This is to be expected, because EPA estimated employment impacts by multiplying projected closures by the number of employees per establishment. Note that in the multifamily sector,

the percentage of employment losses is slightly larger than the percentage of closures. This is because the model establishments most affected by the proposed rule account for a disproportionately high percentage of sector employment.

5 18 Economic Analysis of Construction and Development Proposed Effluent Guidelines May 2002 Table 5 8a. Estimated Employment Losses Zero Cost Pass Through Option Single Family Multifamily Commercial Number Pct. of Total Number Pct. of Total Number Pct. of Total 1 34 0.016% 12 0.034% 162 0.029%

2 145 0.067% 61 0.173% 603 0.110%

3 0 0.000% 0 0.000% 0 0.000%

Option Industrial Heavy TOTAL Number Pct. of Total Number Pct. of Total Number Pct. of Total 1 43 0.029% 0 0.000% 251 0.021%

2 133 0.089% 647 0.233% 1,589 0.130%

3 0 0.000% 0 0.000% 0 0.000%

Source: EPA estimates based on the methodologies presented in Chapter Four.