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Impact Fees

What Are Impact Fees?

Generally speaking, “impact fees” are financial contributions — money or land, for example — imposed by communities on developers or builders to pay for capital improvements within the community which are necessary to service/accommodate the new development.

Impact fees, however, must be reasonable. To ensure fairness, impact fees can only be assessed (1) for capital improvements that are a direct consequence of the new development and (2) in an amount not exceed an the proportionate share required to serve the new development. In other words, a developer cannot be required to pay a disproportionate share of improvements that also benefit other persons, such as a bridge on the other side of town.

Why do communities impose impact fees?

Communities use impact fees, as opposed to other sources of revenue, to fund capital improvements for three primary reasons.

First, many communities either have underestimated their actual growth or failed to engage in long-range, fiscal planning for capital improvements altogether. Accordingly, because these communities have not adequately planned for growth, they need additional sources of revenue, for example impact fees, to fund those capital improvements which are necessary to accommodate growth.

Second, many other sources of revenue have dried up as options for local governments. Over the last several years, fiscal responsibility has been shifted from federal and state governments to local units. For example, municipalities are now required to share more of the burden for transportation costs than in the past.

Finally, some people contend that the burden of paying for capital improvements should be borne by new development because new residents will be the ones who will put pressure on the existing facilities.

Why should REALTORS® care about impact fees?

Although they are an effective means to generate income for the community, impact fees increase the cost of housing. When a community imposes an impact fee on new development, the actual costs are passed on to the purchaser through increased lot prices. As lot prices increase, the number of people who are able to afford the lots decreases. In addition, if the impact fees are too high, prospective homebuyers will look to other communities with lower prices. Accordingly, by reducing the number of prospective buyers who are either able or willing to pay for the increased lot prices, impact fees can have a devastating impact on local real estate markets.

Despite claims by local neighborhood groups, new residents are not the only ones affected by impact fees. According to Planning Magazine, 50 to 75 percent of new homes are purchased by existing residents looking to trade up within the same community. Accordingly, impact fees often penalize longtime tax-paying residents for wanting to stay in the community.

Impact fees articles

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