What are Impact Fees?

Impact fees are charges assessed by local government to cover the infrastructure costs associated with new development. These one-time expenses are typically levied upon issuance of building permits to help ensure that public facilities and services -- including water and sewer systems, parks, and even schools -- have adequate capacity and infrastructure to meet the demands of a growing population. While impact fees are initially charged to the developers of new homes, the cost of the fees may be passed on to the occupants in the form of higher home prices or rents.

What problems do revised impact fee structures solve? Impact fees are often assessed on a flat, per-unit basis; for example, the same impact fee may be charged for a small townhome and a spacious single-family residence even though their "impact" differs. While simple to administer, this approach increases the cost of producing a modestly-priced home by a much greater proportion than that of a higher-cost home, even though the family purchasing the higher-cost home is likely to be in a better position to absorb the price increase. In addition, smaller homes built at higher densities or closer to existing infrastructure generally place a lesser demand on roadways and other services funded through impact fees; a disparity that is not reflected by a flat-fee system. Revised impact fee structures seek to make fee assessments more equitable while also balancing two compelling community concerns: the need for revenue to cover increased infrastructure expenses associated with new development and the need for homes affordable to working families. One approach is to move from a flat, per-unit impact fee to one that is proportionate to the size of a home or based on other housing characteristics that relate to estimated service usage. Proportionate fee schedules help to preserve housing affordability by reducing the fees associated with smaller, starter homes and infill development. Other approaches include allowing fee waivers and reductions for homes affordable to low or moderate income families, allowing impact fees to be paid on a deferred basis and developing impact fee schedules that are based on the level of existing infrastructure in a community, reducing charges in areas that already have significant infrastructure in place.

Solutions in Action

Based on a careful assessment of the County's need for affordable homes, as well as the expected infrastructure costs associated with new development, Alachua County, Florida adopted a residential impact fee schedule that sets fee amounts for parks, fire service, and transportation on the basis of a unit's square footage. The result is that smaller homes tend to be charged lower impact fees, helping to keep them more affordable. Unlike parks and fire service fees, transportation impact fee rates also vary, by development type.  As of January 2010, developers of homes built in accordance with Traditional Neighborhood Development standards (TNDs) pay an impact fee rate that is $527/1,000 sq. ft. lower than the rate assessed on non-TND urban residential development.  TNDs feature a mix of uses (i.e., retail and residential), and provide paths for bicycles and pedestrians, potentially lessening the impact on roadways. The county also has allocated funds for forgivable second mortgages to cover the costs of impact fees for households with incomes below 80 percent of the area median income when they purchase a home below a specified price. Much more information is available on the County's website.

Where are these policies most applicable?

Revised impact fee structures are most likely to influence housing prices in communities experiencing rapid and significant growth. Semi-rural or exurban communities on the borders of expanding cities also may wish to consider implementation of revised impact fee structures. Times of slower development activity may represent a great opportunity to assess whether a community's impact fees are inequitable and in need of revision.  Adopting an equitable impact fee schedule will help ensure that when new development does occur it proceeds in an orderly and well-planned fashion, without compromising either overall public revenue or housing affordability.

In the wake of the mortgage foreclosure crisis, some cities and counties with existing programs have temporarily suspended collections or reduced impact fee assessments.  Others have delayed scheduled increases or adoption of new fees in the hopes of stimulating stalled development.  Notably, in August 2009 the state of Arizona declared a moratorium on the creation of new impact fees or increases on existing fees effective through June 2011.  The effects of such measures are difficult to predict, and some critics of the moratoria suggest that the tight credit market and large supply of foreclosed homes present greater obstacles to new residential development than impact fees.  With tax receipts down in many communities, reduced collection of impact fees may only exacerbate existing revenue shortages.  Supporters counter that reduced impact fees will stimulate new development and, in turn, create new jobs.  View the "Latest News" section of ImpactFees.com to keep up to date on these trends.

Learn more about impact fees Go back to learn about other policies that help Reduce Red Tape.

The Center for Housing Policy gratefully acknowledges the input and feedback provided for this policy section by the follwing reviewers: Thais Austin, Debra Bassert and Paul Emrath, National Association of Home Builders; Becky Koch, HSBC Bank USA. Please note, however, that the views and opinions expressed on HousingPolicy.org are those of the Center for Housing Policy alone.