Living with Impact Fees

For many builders it seems every time they turn around they’re being hit with another fee from their local municipality. So, it should be no surprise that the subject of impact fees is a sore spot with them.
Part of the problem seems to be that in many communities multiple fees are loosely related to the permitting and inspection process, but builders are unclear as to how the collected funds are actually used, or even the justification for their assessment in the first place, relates Alan Dorn of Dorn & Co. Home Builders in Santa Fe, N.M.

Dorn mentions a fee related to the retrofit of low-flow toilets in existing buildings. “I feel the building industry is being unfairly targeted,” he says, “because we already install water-conserving fixtures in our new homes.”
Further complicating the fees issue, Dorn also suspects high impact fees may also be a strategy favored by no-growth advocates. “It takes years to get a subdivision approved in this community,” he says, and, “real estate prices are the highest in New Mexico.”

Dorn adds that no growth isn’t necessarily the sentiment of the entire community. “We do need to have organized and well-planned growth,” he says. “I don’t have a problem with impact fees; it just seems like we don’t always know what happens to them. There’s no accountability,” he adds.

A lack of transparency is one aspect of impact fees that most disturbs builders and developers. Luis Jauregui of Jauregui Architect in Austin, Texas, echoes Dorn’s frustration: “They’re very successful at camouflaging [impact fees], making them very hidden and low profile,” he says. “You’re rarely going to see the term ‘impact fee’ in a bill that a builder or developer is going to pay.”

Impact, permit and hookup fees, according to data published by the National Association of Home Builders, accounted for 4 percent of the price of an average single-family home in 2008. Builders and developers usually pay impact fees upfront. While the cost generally is passed on to the home buyer, a fee paid early on in the production process may well have associated carrying costs for the builder or developer.

An additional consequence may be an adverse effect on housing affordability for some home buyers. Were it not for the economic circumstances prompting the actions, it might be good news that some municipalities are considering moratoriums or reductions on impact fees to spur local building.

The NAHB recently issued a statement to its members on impact fee relief, stating that reducing or waiving the fees could reduce the cost of home building and create a stimulus for development. With a view toward influencing municipalities to reduce or declare a moratorium on impact fees, the association is making available to its members talking points and case studies on impact-fee relief. The NAHB also has published the Impact Fee Handbook, which delves into legal and economic implications of impact fees as well as alternatives and public affairs strategies surrounding the topic.

While builders work to keep a lid on impact fees, localities that have not previously had impact fees are aggressively pushing to adopt such fees or to add new fees to existing schedules. Communities that already charge impact fees for sewer and water infrastructure, for example, may be considering measures that would provide impact fees to help fund local school districts. It should be noted, however, that school impact fees are relatively rare, enforced in less than a dozen states.

What’s an impact fee?

What, exactly, is an impact fee? The fees go by many names: facility fees, capacity fees, mitigation fees, system development charges and capital recovery fees to name a few. Impact fees are charged only to new developments, and they are standardized as opposed to negotiated fees.

The purpose of impact fees is to fund capital improvements for new developments. The term “impact fee” can get a little murky in this regard, particularly when it comes to utility connection fees, which in some municipalities can mix components. For example, a connection fee may cover a water meter, the cost of inspection and administrative costs. As such, it is not considered strictly an impact fee. However, the costs of growth-related capital improvements may also be rolled into connection fees, thus making it difficult to separate the two.

The debate over whether a fee is an impact fee, a service fee or some other kind of tax or surcharge, is not based merely in semantics. Serious legal issues are involved. Many states have passed enabling legislation that allows local governments to impose and collect impact fees, and failure to follow the guidelines and procedures outlined in that legislation could invalidate an impact fee. State impact fee statutes, in addition, may specify which infrastructure improvements may be covered by the fees and which may not. Schools, as noted earlier, are not authorized to collect impact fees in most states.

Impact fees haven’t always been the norm. They became common in the 1950s and 1960s and gathered strength in the 1970s in states like California and Florida that were experiencing rapid growth, a taxpayer revolt against paying for new infrastructure and simultaneous federal reductions in aid for local infrastructure.

Fees may vary

How much a builder pays in impact fees depends on where he or she is doing business. While the fees are almost ubiquitous in states such as California, in other parts of the country the fees—apart from water and wastewater connection fees—are far less prevalent, according to a study by Duncan Associates of Austin, Texas (impactfees.com).

While the Duncan survey does not include data for every municipality, it suggests states where impact fees are most common, most notably in the South and West of the United States, particularly Washington, Oregon, California, Arizona, Colorado and Florida.

Impact fees are not, of course, limited to those states. As of 2007, according to the NAHB, 27 states had impact-fee enabling statutes (see chart). The Government Accountability Office reports that 39 percent of counties and 59 percent of communities greater than 25,000 imposed some sort of impact fees.

Average impact fees for single-family detached housing, according to the 2008 Duncan survey, are $11,239. Excluding utilities, the average total fee is $8,093. Average fees by state show California with the highest fees, followed by Florida and Maryland. The average California fees (higher than $19,000) are more than double the second-highest state (Florida at $9,320).

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