What are Impact Fees? 13 Things (2023) You Need to Know

I’m sure you have heard of impact fees before.

Recently they’ve been making headlines.

For example, in 2021 Boston, marijuana dispensary owners asked the state to reduce the fees they’re forced to pay to cities and towns to set up their operations.

They argue that they have minimal impact on police, fire, and other municipal services.

When they first opened, they may have required additional services and support, but today they need no more help (and possibly less) than a Dunkin’ Donuts shop.

In light of this argument, let’s take a closer look at these fees.

Here are the top things you need to know about them.

1. What is an impact fee?

An impact fee is a fee imposed by a local government within the United States.

The fee may be on a new or proposed development project to pay for all or a share of the costs of providing public services.

Such fees help to reduce the economic burden on the local jurisdiction that will see population growth as the result of the new development.

2. How do impact fees work?

An impact fee is usually a one-time payment that is imposed by a local government on a property developer.

They’re often a popular alternative to raising property taxes as a way to pay for new infrastructure.

Although new public services can be paid for with a special assessment tax, people who already own property in the area would often rather see a developer pay a fee than have their tax rate increase.

In this case, the developer, not the existing taxpayers, would be forced to cover the cost of the new infrastructure necessitated by their development.

Unfortunately, developers can sometimes view impact fees as a disincentive to invest because fees can significantly raise the cost of a large construction project.

That said, research has shown that these fees are more efficient in raising revenue for infrastructure compared with property taxes since property taxes often fail to provide sufficient funding for municipal needs.

3. What is an example of an impact fee?

Here’s an example of what an impact fee may look like.

The City of Oakland in California assesses residential and commercial fees on new construction.

If, for instance, a builder in Zone One is constructing a new single-family dwelling, then the builder would need to pay a $28,000 fee before obtaining a building permit.

Of this $28,000 fee, $23,000 is earmarked for affordable housing, $4,000 goes toward capital improvement, and $1,000 is for transportation.

The city also charges a school fee of $3.48 per square foot for residential buildings.

If this sounds high to you, you would be right.

California has some of the highest impact fees in the entire United States.

Still, these fee structures help to support civic infrastructure and stabilize the housing market.

4. How do impact fees differ from in lieu fees?

Impact fees originated in environmental law practices and in lieu fees.

In the environmental context, in lieu fees are paid by developers as an alternative to building required infrastructure (like stormwater ponds) or compensatory elements that offset damages to the environment.

For example, in lieu fees may be paid to mitigate the destruction of wetlands as a substitute to creating replacement wetlands onsite.

These kinds of fees were limited in their capacity to develop large-scale infrastructure since the developer must usually have the option to build the required infrastructure on site.

Alternatively, impact fees can be charged on any new construction within a designated area, including single-family homes, apartments, and even commercial development, and fund a broader range of infrastructure types.

Thus, city planners now favor impact fees to collect money for facilities and public services.

5. Who pays impact fees?

Developers typically pay the fees because it is their new construction that requires the expansion and upgrade of public services to support the additional population and structure.

6. Who can charge impact fees?

State law will typically authorize legislation that allows local governments to charge impact fees provided that the government satisfies certain conditions first.

For example, in many states, the local government must first adopt a comprehensive plan that includes a capital improvements element.

This plan may also need to be updated every few years, or even annually.

In other areas, voter approval may be required before impact fees can be established.

To find out what is permitted in your state, do your research!

Georgia, for example, regulates impact fees at the state level.

7. What do impact fees support?

Impact fees ultimately pay for road repairs, new water and sewer lines, school construction, park and trails, traffic upgrades, and other services.

8. How much are impact fees?

When calculating the cost of impact fees, local governments consider several factors.

These factors include which facilities may need upgrades, how much money is needed to build new public facilities, and other potential sources of funding for improvements.

As noted above, impact fees are typically one-time charges.

They are calculated based on the size of the development and its costs.

Thus, there is no one set amount that the fees may be.

If you’re looking for an estimate, Oklahoma City levies between 24 cents and 33 cents per square foot on new construction.

9. How do these fees help a city grow?

Impact fees can help to foster new development because they create the enabling infrastructure.

While a city may be densely populated and growing in population, physical growth may be limited without the financing to build more schools, roads and public utility lines.

Impact fees give the city the funds to pay for this infrastructure, and thus allow a city to expand.

10. Can impact fees be reduced?

Impact fees may considerably increase costs to a proposed development.

While the developer pays these costs upfront, ultimately the cost of the fees can be passed along to the consumer.

If you have a development planned in one of the authorized local governments, it is critical that you understand how it may be impacted by fees.

Only then can you plan accordingly.

Under certain scenarios, proposed developments might be eligible for fee credits.

For example, Georgia Code O.C.G.A. § 36-71-7 authorizes local governments to provide credits when a developer constructs improvements or dedicates land or money to the local government for system improvements to infrastructure in a category for which the fee is being charged.

The amount of the credits will be equal to the present value of the construction or the dedicated land.

11. What are the legal issues?

Did you know that impact fees and other exactions may be subject to due process claims?

This is because they challenge the “taking” of private property by the government without just compensation.

To avoid potential legal challenges, impact fees will need to pass the “rational nexus” test.

This test requires that the need for the infrastructure funded by the fees by directly attributable to the development on which fees will be assessed.

In addition, the jurisdiction should be able to demonstrate that the required fee is “roughly proportional” to the impact caused by the development.

12. Can waiving impact fees help promote affordability?

There’s a lot of discussion regarding impact fees and affordable housing.

One way to reduce the cost of developing affordable housing is to waive these fees for developments that meet affordability objectives.

If a development is intending to provide a certain number of affordable housing units, then the local government can adjust their fee assessment accordingly.

13. Why are property taxes not sufficient? 

A report called Paying for Prosperity identified several key findings over the period of 1993 to 1999 when it came to impact fees.

Here’s a summary:

Property taxes increasingly fail to cover the full cost of infrastructure in a new development.

Although property taxes are seen as the traditional way to pay for infrastructure, in many circumstances new property values would have to be very high or property taxes raised significantly for all taxpayers to pay for a new development’s infrastructure.

Impact fees are a more efficient way to pay for infrastructure than general.

They ensure benefits to those who use them and improve efficiency in the provision of infrastructure.

Although these fees do not reflect the full price of infrastructure improvements, they do make the economic linkage between those paying for and those receiving the benefits more direct.

They increase the supply of buildable land.

As mentioned above, when there are no impact fees, the government may not have the revenue necessary to accommodate continued growth.

These fees allow the necessary infrastructure, water, sewer, drainage, and road facilities to be created that will open new parcels of land for development.

Impact fees have complex effects on housing prices.

The study found that these fees reduced land prices by the fee amount, but also raised finished housing prices by about half the fee amount.

So, while the fees lower raw land prices, the amount of the fee reflecting infrastructure value is recovered in the sales price.

Impact fees don’t slow job growth.

These fees are the grease that sustains job growth in the local economy.

They do not detract from the local economy.

Final thoughts

Overall, impact fees are a one-time tax imposed on all new residential and commercial construction by local governments.

They help to support the cost of the growth’s “impact” on vital services such as schools, parks, roads, ambulances, firefighters, and other infrastructure needs.

Some developers and estate professionals call impact fees a “hidden tax” as it slows and discourages growth.

However, studies have found that their interaction with the community are generally positive and a more efficient way to use funds.

If you’re interested in learning more about the fees in your area, make sure you do research.

Impact fees will vary greatly depending on where you live.

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Disclaimer: we are not lawyers, accountants or financial advisors and the information in this article is for informational purposes only. This article is based on our own research and experience and we do our best to keep it accurate and up-to-date, but it may contain errors. Please be sure to consult a legal or financial professional before making any investment decisions.

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Erika

Erika is a former Affordable Housing Director for the City of New York turned full-time Land Investor. She used to help New Yorkers find affordable housing, now she helps people find affordable land around the US.

Prior to starting Gokce Capital, Erika received a Bachelor of Architecture from the University of Southern California and a graduate degree in Urban Policy from Columbia University. She worked as both an architectural designer and engineer in New York before joining the New York City Department of Housing Preservation and Development.

Erika currently lives in the New York Metropolitan area with her spouse, daughter and cat. She is originally from Chicago and still considers herself a midwesterner at heart.

Erika also loves to read, write and travel (fun fact, she has visited all 50 states and more than 30 countries!). Her new book, Land Investing Mistakes: 11 True Stories You Need To Know Before Buying Land, is now available on Amazon.

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