Introduction

The spending of money to construct capital facilities is one of the most important and powerful means of implementing a local comprehensive plan. The timing, location, intensity, and quality of growth is closely linked to and indeed controlled by decisions affecting the construction of essential public infrastructure and the capacity of a community to fund a capital improvement program.

 

Another important consideration for plan implementation is the manner in which funds are raised for infrastructure development. The sharing of the burden of infrastructure financing between established land uses and new development can affect housing affordability, economic development efforts, levels of public services, and competition for tax base with adjoining jurisdictions. Shifting from traditional broad-based funding solutions to development exactions can raise difficult and complex questions of fairness and legality.

 

This paper will focus on one form of development exaction, impact fees. It will examine issues of fairness and legal sufficiency with respect to the calculation and administration of impact fees by units of local government. The findings and recommendations of this report are based on NAHB staff’s detailed examination of 46 local impact fee ordinances from across the United States over a period of three years.

 

A Role for State Enabling Legislation

As of this writing twenty-two states have enacted enabling legislation authorizing local governments to levy impact fees on new development. Strictly speaking, specific enabling legislation is not necessary in states that have delegated broad home-rule powers to local governments (the majority of states). Some of the enabling statutes are detailed and specific, some are general and offer little guidance, some apply only to certain geographic areas within the state. Some states prohibit certain categories of impact fees but none prohibit all impact fees. However, impact fees are not authorized in a handful of "Dillon’s Rule" states where lack of an enabling statute effectively proscribes them.

 

State enabling legislation can play a useful role by providing specific guidance to units of local government. Impact fees, as a form of exaction, must conform to constitutional principles such as "essential nexus" and "rough proportionality" that have been elaborated in court opinions. However, court opinions merely enunciate general principles. They offer little if any specific instruction about how a local impact fee ordinance should be designed and implemented. Given enough time, money, and litigation a body of case law will emerge that will shed light on the numerous subtleties of impact fee practice. A more efficient solution, however, may be for state legislatures to establish norms for local impact fee ordinances that, if held to, will keep the local government on safer constitutional ground.

 

In assisting our local affiliates on impact fee issues we find that there is greater potential for abuse and error by local government and less opportunity for effective redress when state enabling legislation is absent or insufficiently detailed. Based on local ordinances we have reviewed, we conclude that certain key concepts are frequently overlooked or misunderstood. Discussed below are some of these concepts and issues that state enabling legislation could more thoroughly address in order to provide the guidance that local governments need to calculate fees and administer fee programs correctly and fairly.

 

Impact Fee Calculations

The first step in implementing an impact fee program is preparation of a technical memorandum that calculates the share of capital infrastructure costs that new development will pay. The technical memorandum is important because it is needed to demonstrate that the impact fees are logically related to a need created by new development and that the amount charged is proportional to the cost of providing public facilities. The technical memorandum is not part of the impact fee ordinance itself but it provides the necessary rationale for the schedule of impact fees contained in the ordinance.

 

Some state impact fee laws specifically require a technical fee study and mention particular aspects of the study that must be performed. Even in the absence of pertinent state laws, a sound technical impact fee study is essential to establish the legality of impact fees.

 

Methodology

There are several different methodologies that can be used to calculate impact fees. The different approaches can produce different results and it can be argued that some are more realistic than others. These approaches go by various names but there are two essential types: the average cost method and the marginal cost method. Both types are commonly employed in the U.S.

 

The average cost method examines the cost of constructing capital facilities in the past and divides this cost by the population served to produce a figure which is the average cost per capita for a particular type of facility. It is assumed that future costs per capita will approximate the historical costs of providing these facilities. For example, if the capital cost of building and equipping a fire station were $8 million and this station serves a population of 10,000 persons (residential land use only) then the average cost per capita is $8 million ¸ 10,000 persons or $800 per person (if the average household size were 2.0 then the average cost per occupied dwelling unit would be $1,600). Assuming future costs follow historical precedents and are not affected by changes in technology, then the average cost per capita methodology may give a reasonable approximation of the costs to serve new development.

 

This method assumes that the average cost to provide facilities throughout the jurisdiction is the same in any particular part of the jurisdiction. But costs in a particular location depend on local conditions. Using the fire facility fee as an example, the cost of providing fire facilities for a property within the response radius of an existing station will differ substantially from the cost of providing new facilities for properties beyond the reach of existing stations. Properties that can be served by existing fire facilities will not require the expenditure of additional capital funds. The average cost method makes no distinction between properties that require additional capital spending and those which don’t.

 

A variation on the average cost method has been devised which is sometimes called a "cost recoupment" methodology. This method seeks to recoup from new development the cost of the excess capacity present in existing facilities that is available to serve new development. Instead of dividing by the population presently served by the facility, the denominator includes present population plus projected future population of the service area. In this way the government recovers from new development an amount reckoned to be its share of the cost of previously constructed facilities. This could also be considered a variation of the marginal cost method described below because it requires a case by case analysis.

 

The marginal cost method (also called "case-study" method) differs from the average cost method because it does not rely on historical cost data averaged over the whole community population but on specific planned facilities and the populations projected to be served by them. Again using fire facilities as an example, the marginal cost approach would begin with the community’s comprehensive plan to find how many new fire stations were planned to provide a specified level of service (e.g., minimum response time) for future populations. The service area of each station would be examined to determine planned densities, land uses, and populations. The cost of providing service in each service area would be obtained from the same kind of engineering cost estimates used to prepare the capital budget (or from the capital budget itself). Presumably, there would be differences in the costs from station to station reflecting differences in equipment needed to address different fire risks associated with different mixes of land uses. The impact fee calculation would involve dividing the capital cost for each station by the numbers of units (dwellings, increments of non-residential space) projected to occupy the service area of each station.

 

The marginal cost method is more time consuming (therefore more expensive) but is thought to be more accurate because it examines individual service areas and their requirements in detail.

 

It is not uncommon for state enabling legislation to address methodology. For example, the Wisconsin statute forbids use of average cost and recoupment methodologies because it requires fees to be based on "actual costs" for "new, expanded, or improved public facilities."

Population and Land Use Assumptions

 

Many state impact fee enabling laws require the community to specify the population and land use assumptions upon which the impact fee calculation will be based. This is important because the marginal cost and cost recoupment methods rely on projections of future population and land use. However, the average cost method is not so reliant on these assumptions. Normally, the community’s comprehensive plan would be the source for these assumptions and projections. If the community has no comprehensive plan, or it is out of date, a separate study may be used. Communities unwilling or unable to commission a comprehensive plan or special study sometimes ignore the issue of growth assumptions by using the average cost method.

 

The population and land use assumptions are worth examining in detail because the amount of the impact fee will depend on the number of persons, dwellings, and non-residential land uses that will share responsibility for capital costs. A common error in impact fee studies is inadequate consideration of household size trends or failure to consider them at all. Household size is important because a small change in the average household size can create large changes in overall population or in demand for housing. Many studies only consider the community’s household size as reported in the last census and assume that future families will share the same characteristics as existing families. There is no valid reason to make this assumption. Census data show that household size has been decreasing over time for the U.S. as a whole. NAHB studies indicate that this trend is reflected in many local areas as well. The census data also show that families that have recently moved (the source of most local population growth) have a smaller household size than the national average. This trend has the following implications for impact fee calculations: fewer persons in each household means that the marginal impact of each additional dwelling unit is less, furthermore, a greater number of dwelling units will be needed to house an equivalent population, thus sharing costs over a greater number of units and reducing the per unit impact fee amount.

 

Land use assumptions also need to take account of demand from nonresidential land uses in order to avoid overestimating the demands and costs related to population and housing. For example, police and fire capital facilities will be sized to serve both residential and nonresidential development, so costs should be spread over both types in proportion to the demand generated by each.

 

Levels of Service

Level of service is a concept for defining the quantity of public facilities that must be provided in order to adequately satisfy citizens’ demands for capital facilities. For example, the number of public park acres per capita is a measure of the level of service for park facilities and the average response time is a measure of the level of fire/emergency medical/police services. When calculating the amount of public facilities that will be required to serve new growth one must select a specific level of service in order to quantify the required investment. For example, if the selected level of service for park facilities is 0.3 acres per capita and the projected population increase is 10,000 persons then the required investment is 3,000 additional acres. Many communities assume, wrongly, that they are free to select the level of service for facilities to serve new development. In order to respect equal protection guarantees and proportionality requirements, a community may not require new development to fund a higher level of service than that provided to existing development. The fact that higher standards are listed as goals in the community’s comprehensive plan does not affect this requirement. The only level of service that may be used to quantify the public facility requirements of new development is the level of service currently provided in the community. There is one exception, however. A community may require higher levels of service for new development if it is concurrently implementing a plan to achieve the same levels of service for existing development and is funding the plan from revenues other than impact fees on new development.

 

All technical memoranda should address the issue of levels of service explicitly. Many address it implicitly, inappropriately, or not at all.

 

Credits

An impact fee payer is entitled to a reduction in the amount of the impact fee (a credit) to compensate for contributions made or to be made toward the cost of capital facilities. Credits are of three kinds: credit for land or public facilities that the developer may provide himself, credit for a change in land use that results in less impact than the previous land use, and credits for property taxes and other revenues received in the past or to be received in the future which have been or will be used for the same public facilities for which the impact fee is charged. The first two types of credits are generally addressed in the impact fee ordinance itself and will be discussed later. The third type of credit should be part of the impact fee calculation formula and for that reason is discussed here.

 

Many technical memoranda ignore credits altogether and the impact fees thus calculated are higher than they should be due to double charging. The impact fee calculation should not ignore the fact that, before the impact fee was paid for a particular property, that land generated a stream of property tax payments and a portion of those payments went to pay for the same kinds of public facilities for which the property is now being charged an impact fee. As well, in the future, after the property is improved, it will generate a stream of property tax and other revenues which may be used to pay for the very same public facilities for which the impact fee is charged. In order to assure that property does not pay more than its proportionate share for public facilities, credit must be given for past and future payments that were or will be paid for the same purpose. The community’s budgets can be analyzed to determine the percentage of the various revenue streams that were/are allocated to specific capital projects. The present value of the sum of such past and future payments is the credit amount that is subtracted from the nominal impact fee amount.

 

Conversion of payments made at different times to present value requires the selection of an interest rate for past payments and a "discount rate" for future payments. The interest rate for past payments is generally taken from an historical reference such as the consumer price index or various engineering cost indices. The selection of a discount rate for "discounting" future payments to present value is more controversial. The lower the rate the more valuable future payments are in the present, the higher the rate the less valuable. The rate selected could range from the current rate of inflation to interest rates paid on local governments’ long-term obligations.

 

Service Areas

A service area is a geographic area that is served by a public facility. For example, the service area of a neighborhood park is the residential community near the park where the users of the park live. Service areas are generally defined by proximity and accessibility i.e. areas within the service area are closer to the facility and/or have easier access to the facility than areas outside the service area. The concept of service area does not mean that the facility is reserved exclusively for service area residents or that the facility never provides services to those outside the service area, but that the facility was designed and intended primarily to serve a given area.

 

Service areas are important for a number of reasons. The capacity of existing public facilities is usually uneven across a jurisdiction. Some will have capacity to serve additional development, some will not. Land use, density, topography and access will vary from one service area to another and this will cause the expense of providing needed capital facilities for new development to vary from one area to another. Because the law requires that impact fees be roughly proportional to capital costs that arise from development, each service area should be examined to determine the capital cost implications of development in that specific area. The capital cost calculations should also take into account the existing levels of service provided in individual service areas. It will be easier to show that impact fees collected from a property are spent to benefit that property if impact fees collected in a particular service area are placed in an account dedicated exclusively to spending for capital facilities in that service area.

Many jurisdictions designate the entire community as a single service area on the theory that individual capital facilities are part of a system, such as the park system, road system, school system, etc.

 

According to this view, impact fees collected in one area may be spent on any other part of the system because improvements anywhere in the system benefit the entire system. There are several problems with this approach. In general, the benefits of a public facility diminish with distance from it. Therefore, if impact fees collected in one local area are spent to construct a facility in a different area, the area where the fees were paid will not be the principal beneficiary of that capital spending. For example, it is difficult to see the rational nexus between park impact fees collected on the west side of town and a new neighborhood park constructed with those fees on the east side of town.

 

There is case law as well as statutory law in some states to support the position that new development, though it need not be the sole beneficiary of impact fee spending, must benefit more than other property from spending of the impact fees it has paid. Unless impact fees are accounted for and spent within the local service area where they are collected it may be difficult to demonstrate the legally required rational nexus.

 

If a "systems approach" to impact fee spending is taken then a new method of impact fee calculation is required. Since new facilities constructed with impact fee revenues are assumed to improve the "system" for the benefit of all system users, impact fee calculations must account for the fact that the majority of system users are existing residents. Legally, new development must not be asked to pay more than its pro rata fair share for system improvements. Given that in any year the amount of new development is a small fraction of the amount of existing development, new development, therefore, must pay only a fraction of the cost of new capital facilities.

 

Transportation Related Issues

There are a number of technical issues related to the calculation of traffic or road impact fees that do not apply to other types of impact fees. These have to do with peak versus average daily traffic volumes, trip diversion, trip substitution and sources of trip generation data.

 

Peak Traffic versus Average Daily Traffic

Different land uses generate traffic at different rates. Road impact fee formulas should take this into account by making use of local trip generation studies or data from national sources such as the Institute of Transportation Engineers (ITE). The results of trip generation studies are reported as the number of trip ends generated by an increment of land use (dwelling unit, 1,000 square feet of retail space, number of hospital beds, etc.) expressed as the average number of trips in a 24-hour period and/or the average number of trips during the peak hour(s). Some jurisdictions base impact fee calculations on average daily traffic (ADT) and others on peak hour trips. For example, a number of Florida cities and counties use ADT, whereas a number of California and Illinois communities use peak hour traffic as the basis for calculations.

 

Whether ADT or peak hour traffic should be the basis for road impact fee calculations can be debated. A case can be made, however, that not every trip generated by new development creates a need for additional roadway capacity. Trips added to adjacent roads during off-peak hours in most cases will not add significantly to congestion on those roads. For example, a nightclub that opens at 9:00 p.m. and closes at 2:00 a.m. will add trips to the adjacent roads at a time when roads have more than enough available capacity to absorb these trips. It would be difficult to justify road impact fees for this nightclub use because it does not create a need for additional lane capacity. Road impact fees are justified, however, when trips are added during times when the road is already operating at or near capacity (i.e. peak hours) such that the level of service will be degraded unless additional capacity is added. Most land uses generate traffic throughout the day but it is the traffic they generate during peak hours when adjacent roads are least able to accommodate additional trips that is critical to determining the demand for additional road capacity created by new development for which impact fee will be charged. Trips generated during off-peak hours when capacity is ample have little impact, create no need for additional capital improvements, and should not enter the calculation of road impact fees.

 

Trip Diversions

A common but not universal practice is to apply a trip diversion factor in the calculation of road impact fees. This factor accounts for the fact that some trips to a land use are not separate single-purpose trips but instead are diverted from the stream of traffic passing by. For example, the trip diversion factor for a convenience store is high because visits to the store frequently occur while the driver is pursuing another trip purpose, such as returning from work. If the work trip and the store trip were counted separately, doublecounting would occur. The diversion factor for doctors’ offices is low because such trips are usually planned in advance rather than impulsively combined with another trip purpose. The diversion factor is applied as a percentage by which the trips generated by a land use are reduced.

 

Trip Substitution

Not all trips generated by new development are net new trips. Some trips to a new land use replace existing trips. For example, when a neighborhood convenience store opens, some longer trips to a highway shopping center are replaced by shorter trips to the convenience store. The net result is actually lower impact on the road system because trips are shorter. In general, when new retail uses are added to a saturated market, there is not a proportionate increase in shopping trips. Instead, trip destinations shift from one area to another.

 

Because of trip diversion and trip substitution effects, at least one locality, Los Angeles, exempts certain land uses from road impact fees. The exempt land uses are generators of local short-distance trips and include car washes, gasoline stations, automotive repair shops, walk-in or drive-through banks, convenience stores, free-standing supermarkets, storage facilities, convalescent hospitals and restaurants. These land uses are not thought to substantially affect the region’s transportation infrastructure.

 

Sources of Trip Generation Data

The source of the best data on trip generation is a properly conducted study carried out in the jurisdiction which imposes the impact fees. Such studies can be expensive so many resort to data derived from studies in other communities such as the Institute of Transportation Engineers’ manual, Trip Generation. Use of data from the ITE manual is legitimate provided the limitations of the data are well understood. The ITE manual compiles trip generation data on a wide variety of different land uses based on local studies conducted throughout the United States. For some land uses the data are derived from a large number of studies covering a broad range of the independent variables (e.g., number of employees, leasable area, etc.). More confidence can be placed in these data than in the data for other land uses which may be derived from only 2 or 3 local studies. Indeed Trip Generation contains not a few caveats and warnings about data limitations. While the ITE is certainly a reputable organization, it would be a mistake to accept their published data uncritically.

 

Legitimacy of Growth-Related Costs

An essential part of impact fee calculations is the determination of the cost of capital facilities that new development will require. Ideally, the capital facility needs of new growth are set out in a well-considered and duly approved long-range comprehensive plan. Every year a capital improvement plan that identifies the costs and sources of funds for capital projects should be updated and adopted. In the real world, however, impact fee ordinances are frequently adopted in the absence of either comprehensive planning or capital improvement planning. Many, but not all, state enabling acts require both a comprehensive plan and capital improvement plan to be adopted before an impact fee ordinance is adopted.

 

State enabling legislation normally contains a specific description of legitimate capital costs. The local ordinance itself should contain a definition of "capital cost" or "capital facility." For example, the definition may include buildings but not furniture, books, computers, or non-durable items with a useful life of three years or less. Generally, some "soft costs" may be permitted such as legal and engineering costs but these may be limited. Other non-capital costs such as "contingencies," administrative costs," and "interest" are questionable. Operating costs, maintenance, repairs, salaries and other recurring costs should never be included.

 

Impact fee ordinances should distinguish between facilities that are intended to serve new development and those that will correct an existing deficiency or principally benefit existing development. A common problem in the impact fee calculations that NAHB has reviewed is inclusion of capital projects which principally benefit existing development. Some state enabling acts require the specific identification of projects benefiting existing development in the capital improvement plan and identification of non-impact fee revenues to fund them.

 

Unlike general obligation bond issues that must be approved by taxpayers at referendum, the political threshold for impact fee spending is very low. As a result there is not as much incentive to contain costs. Under this relaxed spending discipline municipal departments have a tendency to "gold-plate" their capital requests. This danger is magnified when there is no comprehensive planning or capital budgeting process to require department managers to justify their capital requests to the legislative body in a public hearing.

 

Administrative Issues

The local impact fee ordinance is the legal document that implements the impact fee program. It should establish the administrative procedures by which the program will be implemented covering such issues as when fees are paid, how they will be accounted for and spent, independent fee calculation procedures, refunds of fees collected but not spent, administrative appeals, etc. Together with technically correct impact fee calculations, proper administration of the impact fee program is necessary to establish the constitutionality and legal correctness of the impact fee program.

 

Definition of Capital Costs

The local ordinance should contain a precise definition of the kinds of capital costs that qualify for impact fee funding. Generally acceptable cost items include land, buildings, durable equipment and machinery, paving, landscaping, grading and associated engineering costs. Items that would generally not be considered capital costs include recurring expenses such as for consumable supplies, salaries, training, maintenance, repairs, administrative costs, program operating costs, non-durable equipment (less than three years useful life) and the like.

 

Some items of moderate durability such as vehicles, books, computers and furniture are questionable as capital expenses. The problem with these items is that they are not fixed in location and are hard to track. For example, computers purchased with impact fee funds and placed in a school serving new development one year, may end up in a different school the next year. The portability of these items makes it difficult to assure, or even to tell sometimes, that impact fees are being used to benefit the development that paid the fees.

 

The use of impact fees to pay the interest portion of debt service for capital facilities is controversial. Unlike taxpayers who pay for capital facilities on the installment plan through bond financing, the impact feepayer pays for his share of needed infrastructure all at once in a lump sum. Many times this payment is made years before the facilities are provided. The impact feepayer starts off with a capital facility principal account balance of zero. It is difficult to understand, therefore, how interest on debt can be justified as a capital cost for which impact fees may be expended when the feepayer has paid his share in full before receiving a building permit.

 

Independent Fee Calculation Study

To allow for flexibility in cases involving special circumstances or where the applicant believes that the schedule of fees in the ordinance does not reflect the actual monetary impact of a particular project, the impact fee ordinance should (and many do) provide for variance procedures. This is usually accomplished through an independent fee calculation study. Under these procedures the applicant commissions and pays for a study which, if it convincingly shows that the project will require less public capital expense, may entitle a reduction in impact fees. For example, a road impact fee may be based on trip generation figures from ITE. An applicant for a permit may question the ITE trip rates for his use because they may be based on only a few studies and the range of rates varies widely. An independent study of trip generation at the particular site in question may find lower trip generation rates and justify reduced impact fees.

 

In the case of school impact fees, however, an independent fee calculation option may render the ordinance unconstitutional under state law. The Florida Supreme Court in St. John’s County v. Northeast Florida Builder’s Association found that the provision for independent fee calculations would have permitted families without children in public schools to exempt themselves from the fee. Thus with the entire burden falling exclusively on the users of the public schools, the impact fee was in fact a user fee in violation of the State’s constitutional requirement of free public schools.

 

When Fees Are Due

The most convenient way to administer an impact fee program is to withhold some permit or approval needed for development or occupancy until the fee is paid. Impact fee payment can therefore be made a condition of plat approval, of issuance of a building permit, or of a certificate of occupancy. Probably the most common practice is to make impact fees due at the time the building permit is issued. From the building industry’s point of view it is preferable for the impact fee amount to be determined at the earliest possible time but fall due and payable at the latest possible time. There are several reasons for this.

The earlier a developer or builder knows what his project’s impact fee liability will be the easier it will be to make adjustments. If this information is known too late, it may be impossible to adjust the product or the price to compete in the marketplace. If the ordinance relies on a schedule of standard impact fee charges, then the information can be obtained at any time. If, however, impact fees are determined on a case-by-case basis, or if calculations of credits are involved, then these calculations should be performed well in advance of the time that the fee amounts are actually due, say, at the time of plat approval.

 

Because development does not actually cause impacts until a land use commences or a building is occupied, the fees should not be payable until close to the time that a use or occupancy begins. A more practical reason is that a builder must carry the impact fee from the time he pays it until closing, incurring finance charges during this period which are passed on in the form of higher home prices. If impact fees were paid at time of issuance of the certificate of occupancy (if applicable) or at settlement, carrying costs would be minimized.

 

Most state enabling acts address the timing of the payment of impact fees. The most common practice is to require payment of the fee at the time that building permits are issued.

 

Accounting

Unlike tax revenues which are deposited in a general fund to be spent with broad discretion, impact fees must be separately accounted for and spent for the specific purposes for which they were collected. They must not be freely transferred to other accounts to be spent for other purposes. For example, a park impact fee should be credited to a park capital improvement account in a sub-account for the particular park service area where it was collected. Interest earned on impact fee funds should be credited to the proper accounts. In general, impact fees must be spent for the intended purpose within a definite period of time or else refunded to the feepayer. Therefore, records must be kept of the amounts paid, the identity of the feepayers, the dates the fees are paid into the accounts, and the dates the fees are spent. A frequently established rule is that fees are spent in the same order that they were deposited in the account.

 

The government has little discretion in disposing of the funds in impact fee accounts. They must be spent for the particular capital facilities listed in the capital improvement plan which were the basis for the fee calculations, or they must be refunded. One exception may be recoupment fees. It could be argued that surplus capacity in existing facilities was funded by "borrowing" money from the general fund. Impact fees collected to recoup this expense are repaying this "loan" so they are put into the general fund instead of a special account.

 

Refunds

When the government collects an impact fee for a specific purpose but does not spend it for that purpose, it has no choice but to refund the fee because it may not be used for any other purpose. Therefore, all impact fee ordinances should contain refund provisions. Most ordinances permit impact fees to be held for five to ten years before they are eligible to be refunded. We would argue that, since most capital improvement plans cover a 5-year period, any impact fees not spent in one 5-year capital budget cycle should be refunded. It hardly needs to be mentioned that impact fees should be refunded with interest.

 

The interest rate should be the same as that which the government receives on its long-term deposits.

The fact that a refund is due indicates that the government erred in collecting the fee. Therefore, the government has an affirmative obligation to identify the feepayers who are due a refund and to make the refunds promptly. Unfortunately, most impact fee ordinances put the burden on feepayers to prove to the government that they are owed refunds. Few ordinances address the issue of unclaimed or undeliverable refunds. These should probably remain in the original impact fee account rather than transferred to the general fund.

 

Some ordinances impose an administrative fee that is deducted from refunds. Given that the government erred in collecting the fee or in failing to spend funds in a timely manner, the feepayer should not be charged for the government’s mistakes. In addition, spending impact fees on administration violates the principle that impact fees must not be used for operating expenses but only for the capital facilities for which they were collected.

 

Advisory Panels

To insure fairness in the administration of the impact fee program, oversight should be provided by an independent, objective citizen advisory panel. This is needed because government has a vested interest in the revenue produced by the program and therefore cannot provide objective and unbiased oversight. This panel should be composed of citizens appointed by the legislative body and at least 40 percent of its members should represent those most affected by the program, including builders, developers, real estate agents, architects, engineers, etc. No elected or hired official of the local government should sit on the panel.

 

The panel should conduct an annual audit of impact fee accounts, review the administration of the program, as well as annually assess impact fee calculations and fee schedules. The panel should advise the legislative body on the operation of the impact fee program by publishing an annual report. The advisory panel can also play a role in the appeals process by hearing appeals in the first instance and issuing a non-binding, advisory opinion. Eight states have made advisory panels a requirement in their impact fee enabling legislation.

 

Appeals

A feepayer who believes he has been unfairly treated should have access to an appeals process. It is in the government’s interest to establish an administrative appeals process to avoid costly litigation. The ordinance should provide the feepayer the opportunity to seek relief by submitting alternative fee calculation studies or other evidence to the agency administering the fee program. The administrative agency’s decision could be appealed to the citizen advisory panel or (if established) a hearing examiner or board of administrative appeals. The Indiana impact fee statute requires establishment of a special impact fee appeals board composed of a real estate agent, an engineer and a certified public accountant. State enabling statues frequently address the subject of appeals, including the right to a hearing in court, and may specify whether appeals taken to court are heard de novo or on the record.

 

Credits

In most cases the impact fee amount due can be determined from schedules in the ordinance. In some instances, however, adjustments will need to be made on an individual basis. For example, a developer may agree to provide land or to construct facilities of the type for which impact fees would be charged. In such cases the developer is entitled to receive a credit equal to the market value of the land or facilities provided which is subtracted from his impact fee bill. In cases where the value of land or facilities exceeds the amount of impact fees due, the developer might receive the difference in cash or in the form of transferable credit against future impact fee liabilities. The latter could be limited to apply only to the specific category of fees for which credit was originally granted.

 

Credits should also apply when there is a change in existing land use. For example, if a land use is changed from residential to commercial there will be an impact due to increased traffic. But the impact fees should not be based on the total number of trips generated by the commercial use but on the net increase in trips. The residential trips that were taken off the roads by the change of land use are the basis for the credit.

 

Sometimes land use changes from a more intense use to a less intense use. The reduction of impact on public infrastructure is a benefit to the community. A case can be made that if developers whose actions increase the impact on infrastructure must pay a fee for that impact, then developers whose actions reduce impacts should receive something (a reverse impact fee) from the government. Government may resist making cash payments in such cases but transferable impact fee credits are certainly appropriate.

 

Exemptions

For reasons of public policy government may wish to make some uses exempt from the payment of impact fees. One example of exempt land use might be affordable housing for low- and moderate-income households. It would not be fair, however, to burden new development with increased fees because some categories are exempt. Capital facilities for exempt land uses should be funded from a source of revenue other than impact fees on new development.

 

Exemptions can raise constitutional concerns about equal protection because some properties are charged impact fees and some are not. A valid public purpose can justify unequal treatment but some communities take the extra step of establishing administrative procedures whereby impact fees are paid on behalf of exempt categories by general revenues passed through a non-profit organization.

 

Grandfathering

When first implementing an impact fee program the question arises about which properties, if any, should be grandfathered, i.e. deemed to have established a prior right to proceed with development without paying impact fees. For example, on the effective date of the impact fee ordinance there may be projects in the approval pipeline which were accepted for processing before an impact fee program was either contemplated or announced and whose feasibility relies on financial assumptions that did not include payment of impacts fees. Depending on the fee levels, these projects may fail if required to pay impact fees. In fairness, projects accepted for processing before announcement of an impact fee requirement should be grandfathered.

 

Conclusion

Impact fee calculation and administration is complex. This is necessarily so because, as exactions, there are specific legal requirements that pertain to impact fees that do not pertain to traditional revenue measures. The NAHB’s review of a number of local impact fee ordinances over several years reveals that there are areas where practitioners are prone to error. State enabling legislation may play a role in reducing errors by establishing uniform requirements for local ordinances and guidelines to help local ordinances avoid legal pitfalls.