Impact Fee: Detailed Explanation and Overview
Definition
An Impact Fee is a charge imposed by local government entities—such as a city or county—on developers intending to undertake new development projects. The primary purpose of this fee is to offset the costs associated with the expansion of public services (such as water, sewage, roads, and parks) necessitated by the new development. While impact fees are often associated with residential properties, they must be legally applied equally across various types of properties, including commercial and industrial developments. Also, it is prohibited to implement these fees for the construction of new schools.
Examples
Example 1:
The city of Pleasantville faces the necessity to upgrade its water system and extend water mains to accommodate Big Meadows, a new subdivision proposed on the west side. The estimated upgrade cost is $3 million. As a part of the rezoning approval process, Pleasantville imposes an impact fee of $15,000 for each new home and $1.00 per 1,000 square feet of new industrial space within the subdivision.
Frequently Asked Questions (FAQs)
1. What is the main purpose of impact fees?
Answer: The main purpose of impact fees is to help local governments cover the costs of expanding necessary public services to new developments. These services include utilities, infrastructure, and parks, ensuring these services can support the new development without burdening existing residents.
2. Are impact fees only imposed on residential properties?
Answer: No, impact fees can be imposed on all types of properties, including residential, commercial, and industrial developments. However, the fees must be applied equitably across different property types.
3. Can impact fees be used to fund new school construction?
Answer: By law, impact fees cannot be utilized to fund the construction of new schools. They are designated explicitly for other infrastructural and public service enhancements.
4. How are impact fees calculated?
Answer: Impact fees are typically calculated based on the estimated cost of service expansions required by the development. Each locality may have specific methods and formulas for determining these fees, which can vary depending on the type and size of the development.
5. What happens if a developer does not pay the impact fee?
Answer: Payment of the impact fee is generally a prerequisite for receiving the necessary permits and rezoning approvals. Failure to pay the fee will typically result in the denial or delay of these approvals, effectively halting the development project.
- Zoning: The legislative process for dividing land into zones for different uses such as residential, commercial, and industrial. Zoning determines how property in specific geographic zones can be used.
- Development Charges: Broader term often encompassing impact fees as well as other charges imposed by local governments on new developments to cover associated infrastructural and service costs.
- Public Services: Services provided by the government to its citizens, such as water, sewage, roads, and emergency services.
- Urban Planning: A technical and political process focused on the design and regulation of the use of space within an urban area.
Online Resources
- National Association of Home Builders (NAHB) Guide on Impact Fees: NAHB Guide
- Municipal Research and Services Center (MRSC) Overview of Impact Fees: MRSC Impact Fees
- Urban Land Institute: ULI Impact Fee Studies
References
- Nelson, Arthur C., “Impact Fees for Transportation and School Facilities: A Guide for Policymakers.” Washington, D.C.: American Planning Association, 1988.
- Southeast Michigan Council of Governments (SEMCOG), “Impact Fees: Guidebook and Regional Policy Recommendations.” SEMCOG, 2006.
Suggested Books for Further Studies
- “Impact Fees: Principles and Practice of Proportionate-Share Development Fees” by Arthur C. Nelson | ISBN-13: 978-0918286933
- “Development Impact Fees in California: Policy Issues and Options” by James Payne | ISBN-13: 978-0944826908
- “The Implementation and Performance of Local Options Taxes for Funding Public Education in Florida” by Judith A. Layzer | ISBN-13: 978-0312212593
Real Estate Basics: Impact Fees Fundamentals Quiz
### What is the primary purpose of an impact fee?
- [ ] To finance the construction of new residential buildings.
- [x] To offset the cost of expanding public services due to new development.
- [ ] To increase city revenue for unrelated projects.
- [ ] To fund local school construction.
> **Explanation:** The primary purpose of an impact fee is to help local governments cover the costs of expanding essential public services like water, sewage, roads, and parks due to new developments.
### Can impact fees be used for building new schools?
- [ ] Yes, it is one of their main uses.
- [x] No, legally they cannot be used for school construction.
- [ ] Yes, but only for elementary schools.
- [ ] Yes, but only in urban areas.
> **Explanation:** By law, impact fees cannot be imposed or used to build new schools. They are strictly for other infrastructural and public service enhancements.
### Are impact fees usually applied to only residential properties?
- [ ] Yes, commercial properties are exempt.
- [x] No, they must be applied equitably across various types of properties.
- [ ] Yes, and also to government buildings.
- [ ] No, but only apply to businesses.
> **Explanation:** Impact fees must be legally applied equitably across different types of properties including residential, commercial, and industrial developments.
### What happens if a developer fails to pay the required impact fee?
- [x] Their development project may be denied or delayed due to non-approval of permits.
- [ ] They can continue with the project without any issues.
- [ ] The impact fee will be waived.
- [ ] The city will fund the impact fees initially and collect later.
> **Explanation:** Without the payment of the required impact fee, necessary permits or rezoning approvals will typically be denied or delayed, halting the development project.
### How are impact fees calculated?
- [x] Based on the estimated cost of expanding public services required by the new development.
- [ ] On a flat rate determined by the city council.
- [ ] By evaluating the profit margin of the developer.
- [ ] Based on the developer's budget for public contributions.
> **Explanation:** Impact fees are generally calculated based on the estimated cost of the service expansions necessitated by the new development, such as road improvements or extending utility lines.
### What term best describes Impact Fees?
- [ ] Penalty Fee
- [ ] Environmental Fee
- [x] Development Charges
- [ ] Special Tax
> **Explanation:** Impact fees are a type of development charge imposed on new developments to fund the necessary upgrades and expansions in public infrastructure and services.
### Can impact fees vary based on property type?
- [x] Yes, but they must be applied equitably across different property types.
- [ ] No, they are the same regardless of property type.
- [ ] Yes, residential properties are exempt.
- [ ] No, only commercial properties pay impact fees.
> **Explanation:** Impact fees can vary based on the type or size of the property but must be applied equitably and not favor any particular kind of property over another.
### Who typically imposes impact fees?
- [ ] The Federal Government
- [ ] Private Developers
- [x] Local Governments (cities/counties)
- [ ] Public Transportation Departments
> **Explanation:** Impact fees are typically imposed by local government entities like cities or counties to help cover the costs of public service expansions due to new developments.
### Which of the following services are usually funded by impact fees?
- [ ] School construction
- [ ] Employee salaries
- [x] Water system upgrades, sewer extensions, road expansions
- [ ] Community festival events
> **Explanation:** Impact fees are often used to cover the costs of upgrading water systems, extending sewage systems, expanding roads, and other necessary infrastructure and public services needed due to new developments.
### Can a developer contest the imposition of an impact fee?
- [ ] No, once set, it is non-negotiable.
- [ ] Only if the fee reaches a certain amount.
- [x] Yes, developers can legally contest impact fees if they believe them to be unjustified or excessively high.
- [ ] Only in urban development areas.
> **Explanation:** Developers have the right to contest the imposition of impact fees in legal settings, particularly if they believe the charges are unjustified or disproportionately high.
