About Impact Fees: General FAQs

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.

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.

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 affordable housing. Linkage fees are premised on the basis that lower-wage workers, who are needed to build and work in new nonresidential development, should also be able to afford adequate housing within the community.

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.

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.

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.

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.

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.

Impact fees vary greatly by region and facility. Fees are generally highest in Western states (California, Oregon, Washington and Arizona) and lowest in South Central states (Texas, Oklahoma, Arkansas and Louisiana). Fees are usually highest for school facilities (often over $10,000 per dwelling) and lowest for police facilities (often under $500 per dwelling).

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.

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).