Development Impact Fees

Definition of "Development impact fees"

Written by

Denise Cunningham

Coldwell Banker RPM Group - North Little Rock

The meaning of a development impact fee or impact fee defines a one-time cost the local government imposes on a brand new or planned development project (regularly on a property developer.) The impact fee covers the costs associated with public services provisions designated for further development. 

Impact fees sustain real estate development.

As we know, new residential developments draw additional residents in substantial numbers. The process can overwhelm the city’s existing infrastructure and public services, such as the police, fire departments, schools, water, and sewerage. Then enter impact fees into the big picture since they will balance the extra expenses. In other words, development impact fees mean a charge on new land development to fund and pay its construction costs and cover its improvement expansion. 

In a nutshell, local governments, trying to manage population growth in a given area, have implemented the impact fees to decrease the economic burdens. Also, suppose a business entity or an individual generates externality within a region. Then, the local government can decide to levy a development impact fee too.

How do development impact fees work?

For starters, state law has to empower local governments to charge impact fees based on voters’ approval and the municipality’s adoption of an all-inclusive plan. Once passed, local authorities can determine the sum of these impact fees, considering the following factors. First, they evaluate the new construction’s dimension. Then, they calculate implementation expenses and how much they will affect the immediate surrounding area.

Did you know that impact fees have become a popular alternative to boosting real estate property taxes to fund new infrastructure? New infrastructure is often paid for by a special assessment fee placed on taxpayers within a particular district.

On the other hand, property owners in a quickly growing neighborhood would like to see the developer pay an impact fee directly at a subdivision or the construction permit stage.

Developers are against paying impact fees.

Developers frequently consider impact fees a disincentive to spend since they may dramatically increase the cost of a big building project. High construction expenses, in turn, might lead to the loss of future jobs in a region. This fear rarely materializes, though. Development impact fees proved an efficient solution for increasing returns for infrastructure compared with property taxes. The latter often fails to safeguard sufficient funding for local needs. 

What charges do development impact fees entail?

If one plans to build a new unit, first, they would have to pay a sum for affordable housing, capital improvement (sewer and water), school fees, and transportation expenses before acquiring a building permit. 

Ask real estate agents in Oakland, CA! They will confirm that the local authorities levied residential and commercial fees on new single-family homes in Zone One of approximately $28,000 in 2021. These numbers make the Golden State of California boast some of the most impressively high development impact fees in the US.

Why do many prefer development impact fees over property taxes?

On the downside, impact fees raise the costs of new housing units, for sure. New home buyers will receive the costs of the payments. However, a region’s or neighborhood’s physical expansion, such as building public utility lines, parks, recreational facilities, roads, and schools, encounters severe financial limitations without impact fees. Property taxes would not suffice to sponsor the necessary infrastructure. They can cover the framework of new developments if authorities implement substantial tax raises, which nobody wants. 

On the other hand, impact fees are favored because the beneficiaries of the new infrastructure receive the money from the payers directly. Finally, impact fees will increase the supply of buildable land if the government can’t locate a necessary budget for infrastructure.

Ultimately, the financial dispute over impact fees revolves around its ambivalent nature. Firstly, they boost the finished home price. However, they also cut down the land cost.