Q: What is an impact fee?
A: An impact fee is a charge on new development to pay for the construction or expansion of off-site capital improvements that are necessitated by and benefit the new development.
Q: Are impact fees referred to by any other name?
A: Yes, early water and wastewater impact fees were referred to as capital recovery or expansion fees. In California and Washington, impact fees are often known as mitigation fees; in Oregon, as system development charges; in Minnesota, as service availability charges; and in North Carolina, as facility fees. In some states, such as Kansas, Colorado and Tennessee, impact fees are alternatively applied as adequate facility or excise taxes. In most places, however, they are generally referred to as development fees or impact fees.
Q: What is a linkage fee?
A: A linkage fee is a “housing” impact fee. Linkage fees, which are found primarily in California, New Jersey and Massachusetts. are a means for cities to collect monies from new commercial and industrial development to provide for affordable housing. Linkage fees are premised on the basis that lower-wage workers, who are needed to build and work in new non-residential development, also need to be able to afford adequate housing within the community.
Q: When did impact fees first become popular?
A: Impact fees as we know them today first came onto the scene in Florida and California during the late 1970s as a result of taxpayer revolts and reductions in federal and state aid for local infrastructure. Their use and popularity quickly spread throughout the Sunbelt and western states.
Q: How prevalent is the use of impact fees today?
A: According to recent national surveys, about 60 percent of all cities with over 25,000 residents and almost 40 percent of all metropolitan counties use some form of impact fees. In California and Florida, the extent of cities and counties using impact fees is at 90 and 83 percent, respectively.
Q: What is the legal basis for impact fees?
A: Impact fees must meet the "rational nexus" and "rough proportionality" tests. First, there must be a reasonable connection between the "need" for additional facilities and new development. Second, it must be shown that the fee payer will "benefit" in some way from the fee. And third, calculation of the fee must be based on a proportionate "fair share" formula.
Q: How many states have adopted impact fee enabling acts?
A: Since1987, 26 states have passed impact fee enabling acts. Most of these states are located in the western United States, Great Lakes region, and on the Atlantic coast. Unfortunately, many of these acts are as prohibitive as they are permissive.
Q: How do impact fees differ from negotiated exactions?
A: Negotiated exactions are determined on an ad hoc project-by-project basis through the development approval process. Impact fees are based on objective fair share studies and standardized pro-rata formulas.
Q: How do impact fees differ from taxes?
A: Impact fees are authorized through the police power; not the taxing power. They are part of the development approval process. Requiring an impact fee to provide adequate public facilities is similar to meeting site planning and zoning requirements.
Q: How much is the average impact fee?
A: Impact fees vary greatly by region and facility. Highest fees are in California and lowest are in the Midwest. In 2004, the national average road fee per single family unit was just under $1,700 and combined water and wastewater fees were about $4,000. Average park fees were about $1,200 per unit and average pubic safety (police and fire) fees were at about $500.
Q: What key policy decisions need to be made during an impact fee study?
A: In drafting an impact fee study, the community must make local policy decisions relating to facilities, methodology, exemptions, offsets, benefit areas, and percent cost recovery.
Q: What facilities can impact fees be used to pay for?
A: The type of facilities that an impact fee may be assessed for depends on local legal authority. In states with enabling acts, facilities are often limited to basic services, such as water, wastewater, roads and drainage. In states with more liberal home rule authority, however, facilities are often unlimited as long as a nexus can be determined.
Q: What criteria should be used in the selection of facilities?
A: In deciding which facilities to adopt impact fees for, the following criteria should be considered: 1) statutory limitations, 2) other funding options, 3) availability of plans and data, 4) current levels of service, 5) political support, and 6) revenue potentials.
Q: What are some innovative impact fee techniques being used today?
A: Seeking to address housing affordability issues, more fees now recognize size differences in residential units. Two other trends are the reduction or elimination of fees in areas with limited or no growth-related facility needs, such as in central cities; and the recognition of variable cost differentials such as distance (trip length) and density.
Q: How are various land uses assessed?
A: Impact fees are assessed based on the facility demand of the proposed use as measured by its type, size and location. Residential uses are usually differentiated by type or size of unit (bedrooms or floor area) and non-residential uses by amount of floor area.
Q: What basic provisions should be included in an impact fee ordinance?
A: Impact fee ordinances should at least include provisions for a fee schedule, fee methodology, benefit districts, offsets and credits, updating frequency, spending limits and refunding, phasing and indexing, independent fee studies, and definitions.
Q: When is an impact fee usually paid?
A: Most impact fees are paid at the time of building permit issuance. However, some fees are paid earlier at the time of subdivision or plat approval. A few are even paid later at the time of certificate of occupancy issuance. In the case of utilities, impact fees are usually paid at the time of actual connection or hookup to a water and wastewater system.
Q: Can impact fee revenues be spent on operating and maintenance costs?
A: No. Impact fees can only be spent on capacity-enhancing capital facilities.
Q: Are changes in use or additions to existing structures charged an impact fee?
A: Changes in use within an existing structure usually are not required to pay an impact fee because the amount of time to monitor and administer such efforts rarely justifies the amount of return revenue. Modest additions or expansions to and the replacement or remodeling of existing uses or structures are also not usually charged.
Q: What uses can be exempted from payment of an impact fee?
A: Case law requires that impact fees be applied to all new uses in a “proportionate share” manner relative to their impact on public facilities. Therefore, no new use should be exempted from its impact fee obligation. In reality, exceptions or waivers are often made for low-income housing, non-profit, religious and governmental uses.
Q: How can the effect of impact fees on affordable housing be mitigated?
A: Since affordable housing creates a demand for public facilities just as does market-rate housing, they also have an impact fee obligation. However, there are several ways to reduce the "impact" of impact fees on affordable housing. First, variable rates based on unit size or number of bedrooms can recognize the lesser impact of smaller units on pubilic facilities. And second, local government can make a policy decision to pay the impact fees for affordable units from other revenue sources.
Q: What are benefit districts?
A: Benefit districts are territorial divisions within which collected fees must be spent.
Q: What are assessment districts?
A: Assessment districts are territorial divisions within which fee schedules may vary.
Q: What is an independent fee study?
A: An independent fee study is a special professional and technical analysis of a specific use or project to determine if it has certain unique conditions, characteristics or considerations that would allow the charging of an impact fee other than that prescribed in the adopted fee schedule.
Q: Why are impact fees phased and indexed?
A: New fees are usually phased in over a period of months or years to soften their impact on the local real estate market. Indexing is the use of automatic annual fee increases based on the consumer price index (CPI) or other cost index to ensure that the fees keep pace with inflation.
Q: Do impact fee revenues have to be spent within a certain period of time?
A: Yes, impact fee revenues should be spent within a reasonable period of time (usually six to eight years from collection) or be refunded to the fee payer.
Q: Can impact fee revenues be deposited in a general fund?
A: No, fee revenues must be earmarked and deposited in special dedicated accounts.
Q: What is an impact fee offset?
A: When a developer contributes actual off-site facility improvements or dedications that mitigate the impact of a particular project and the need for impact fee-related public facilities, the project's impact fee should be reduced (offset) by the value of the improvement or dedication. Offsets are given to ensure that new development does not pay twice for the same facilities.
Q: What is an impact fee credit?
A: Credits are based on the amount of property and sales taxes paid or being paid by the new use for the same facilities and are incorporated in the impact fee schedule during preparation of the study. Credits are given to ensure that new development does not pay twice for the same facilities.
Q: How frequently should an impact fee study be updated?
A: Most state enabling acts stipulate an update time limit. If none are required, updates every three to five years are recommended to keep facility costs and data up-to-date.
Q: Do impact fees negatively affect move-up homebuyers?
A: No, if the price of new housing actually rises because of impact fees, then the value of existing housing will follow suit because it is an integral part of the local real estate market. Current move-up homebuyers who move up will be able to use their “windfall profits” to pay for the increased costs of the new home. As they say, “a rising tide lifts all boats”.
Q: How do impact fees benefit existing, as well as new residents?
A: Adoption of impact fees reduces pressure on local residents to raise taxes and fees. And with new development paying for its own capacity-enhancing infrastructure needs, any current funds that have been designated to pay for those projects can be shifted to the more immediate needs of existing residents, such as for facility maintenance and rehabilitation.
Q: Are impact fees a no-growth tool?
A: No. Just the opposite is true. Impact fees facilitate growth by expediting development approvals, increasing the amount of developable lands, and reducing citizen opposition to new growth.
Q: Do any builders and developers support the use of impact fees?
A: Many builders and developers are impact fee proponents because they know that impact fees add predictability to the development approval process and create a "level playing field" between them and their competitors. They also know impact fees replace less fair negotiated exactions.
Q: What are some significant recent trends involving impact fees?
A: First, impact fees have continued to significantly increase in popularity and usage. Second, there has been a parallel reduction in builder and developer opposition (and subsequent litigation), Third, it is now much more common for communities to recover full facility costs (than to discount them and charge less than full value). And fourth, there has been a greater use of creative methodologies (such as residential fees that vary by unit size).
Q: How are impact fees calculated?
A: Determination of an impact fee begins with calculating demand-to-capacity ratios for different capital facilities and then estimating the number and cost of facilities that will be necessary for meeting a prescribed level of service for a growing population.
Q: Who actually pays the impact fee (incidence)?
A: In the short-term, impact fees may cause a slight increase in housing costs if the local real estate market allows the builder to shift the cost forward to the buyer. However, in the long-term it is more than likely that the cost will be shifted backwards to landowners in the form of lower prices that may be bid for undeveloped land.
Q: What is a level of service?
A: A level of service is a measure used to characterize the operating conditions and performance of a public facility or service. The term is most commonly applied to traffic operations, where designations go from A (best) to F (worst).
Q: What is an existing deficiency?
A: An existing deficiency is an existing inadequacy in the condition or performance of a public facility or service with respect to the adopted or desired level of service.
Q: May a lesser impact fee be charged than is recommended in a study?
A: Yes. Since a city is not required to impose impact fees, it may also choose to set its fees below the level necessary to fully recover necessary facility improvements. However, if a reduction is made the percent should be the same for all uses to maintain “fair share” relationships.
