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Common revisions to Impact Fees

Impact fees assessed on a flat, per-unit basis divide the costs associated with new development equally among all new housing units, regardless of their individual characteristics. However, factors such as development density, location and unit type and size can substantially influence the actual per-unit demand for certain services and infrastructure. Wastewater collection systems, for example, have been found to be less costly to operate and maintain in higher-density areas as compared with lower-density areas. Similarly, the number of school-aged children tends to be higher in single-family homes as compared with multifamily units.

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. In addition to being more equitable than a flat-rate system, this approach has the benefit of more precisely satisfying the proportionality requirements that require that exactions of this nature be tied to the expenses on which they are based.

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 change.  Adopting an equitable impact fee schedule will help ensure that when new development does occur, it will not compromise either overall public revenue or housing affordability.

Communities have adopted a variety of approaches to revising impact fee structures. Jurisdictions may base impact fee amounts on unit size or type, location or density — all features that are likely to reflect the demand for services introduced by each unit. Reducing the fees charged for smaller homes and/or homes located in areas with pre-existing infrastructure facilitates the development of more less-costly homes without compromising the overall amount of revenue available to meet new infrastructure needs. Some states also authorize communities to offer full or partial impact fee waivers to developers of homes that meet specified affordability standards. To ensure there is no reduction in funding for new infrastructure, some of these jurisdictions require that the lost revenue be replaced with funds from another source.

Proportionate Impact Fee Schedule

There are a range of aforementioned variables that may be used as the basis for a proportionate impact fee system. For each of these factors, data can be used to design a proportionate impact fee schedule.

Some jurisdictions base their impact fee schedule on data that assesses the relationship between the type and size of a housing unit and the average number of persons per unit. As the unit size of a single family detached homes gets larger the number of occupants increases as well, leading to a greater demand for infrastructure and public services such as roadways and parks, for which usage tends to increase with occupancy levels.

Some jurisdictions choose to further refine proportionate impact fees based on a combination of relevant characteristics. For example, a community may vary water impact fees by lot size and miles from a water supply facility, because water usage tends to increase on larger lots and the cost of supplying water grows with distance. By combining unit size with other variables, it may be possible to further reduce the fees levied on affordable homes

Kirkland, Wash., a suburb of Seattle, adopted a new transportation impact fee schedule that accounts for differences in rates of trip generation — that is, the number of times vehicle travel from the home is initiated during peak hours — and the average trip length for different types of housing. As indicated in the table below, because residents of multifamily and senior homes tend to use their cars less frequently than residents of single-family homes, placing a lesser demand on roadways, impact fees for these types of units are lower than for detached units. Presumably, variables related to housing density and proximity to public transit — factors that have been shown to contribute to decreased vehicle use — could also be used as the basis for charging proportional road impact fees.

Land Use* Trip Rate ** Trip Length (miles) ** 2016 Fee per Unit
Detached Housing 1.01 3.5 $5,009
Attached and Stacked Housing 0.56 3.7 $2,855
Senior Housing 0.28 2.8 $1,427
Nursing Home 0.22 2.8 $742
Congregate Care/Assisted Living 0.17 2.8 $573

Traffic, Park, and School Impact Fee. 2016. Kirkland, WA: City of Kirkland, Department of Public Works.

*Unit of measure for all land uses is “Dwelling,” except for nursing home, for which the unit of measure is “beds.”
**This 2009 data for trip rate and length estimates were derived from the Institute of Transportation Engineers Trip Generation Manual. An updated set of data is available for purchase here.

Allow Fee Reductions or Waivers

To help maintain housing affordability and/or stimulate development in targeted neighborhoods, some communities offer impact fee reductions for qualifying projects, or waive fees altogether. In some cases, state enabling laws require that the waived revenue be replaced with funding from another source. This replacement requirement helps to ensure that communities have sufficient funds available to meet their growing infrastructure and public service needs as impact fee revenue is reduced. While some communities use federal CDBG funds or proceeds from a local housing trust fund to fill this gap, other jurisdictions may offer forgivable loans or silent second mortgages to qualifying families.  To ensure that working families benefit from impact fee waivers, some communities continue to assess impact fees on developers but provide a forgivable loan or silent second mortgage in the amount of the fee directly to eligible homebuyers. This approach assumes that developers simply add the impact fee amount to the price of the home and provides equivalent assistance to the homebuyer to balance out the added cost.

The homebuyer is not required to make payments on either a silent second or a forgivable loan.  The silent second mortgage is paid off with proceeds from the sale of the house when the new homebuyer sells, and the forgivable loan is forgiven by a certain percentage each year until it is eventually completely forgiven.  If the new homebuyer sells before it is completely forgiven, the homebuyer pays off the remaining balance of the loan with proceeds from the sale of the house, and the next qualified family will receive the forgivable loan.  By allocating funds from a separate source to the homebuyer, local governments can ensure that working families get the same benefit that may be achieved through a fee waiver without taking the risk that the benefits of the fee waiver may not be passed on to working families.

Allow Impact Fees to be Paid on a Deferred Basis

While many communities collect impact fees upon approval of a development site plan or issue of a building permit, setting payment due dates this early in the development process results in additional carrying costs for the developer or home builder. These costs will likely be passed on to new residents in the form of higher home prices, without a corresponding increase in the level of services provided. To mitigate additional increases in home prices caused by early collection of impact fees, some communities allow deferral of payment until the issue of a Certificate of Occupancy or at the final inspection.  This may be one option for communities considering waiving impact fees in the face of an economic slowdown. Allowing developers to defer payment of impact fees until after projects have been completed or sold may reduce upfront costs and, potentially, encourage job creation.  Instead of losing potential revenue, deferral of payment may allow communities to assist struggling projects while not losing revenue for infrastructure needs.

Alternatively, Capacity Unit Assessment (CUA) programs may be used to reduce the cost barriers imposed by impact fees by allowing payments for the infrastructure associated with new development to be spread out over time. Rather than charging home builders an upfront per-unit fee — which is often passed on to buyers through an increase in home prices — local governments finance the costs of the new infrastructure, typically through the sale of bonds. Buyers of the new homes then pay an annual tax surcharge over a defined number of years to service this debt. While there are generally additional administrative fees and interest charges associated with collecting payments over time, homeowners benefit from the ability to spread costs over the life of the CUA, which may be up to 20 or more years.

Adjust Impact Fees Based on Available Infrastructure and Service Area

When designing an impact fee schedule, many localities apply the same fee rates throughout the entire jurisdiction. However, denser parts of a city or county often have better-developed infrastructure than areas on the fringe. When infrastructure availability is uneven across a jurisdiction, some local governments choose to subdivide the jurisdiction into smaller “service areas,” with fees within each service area varying depending on existing infrastructure capacity. These jurisdictions charge lower impact fees in sub-areas requiring fewer infrastructure improvements to accommodate new growth. This tiered fee schedule not only facilitates the development of more affordable homes, but also helps to discourage development in fringe areas that leads to increased sprawl. However, some critics argue that impact fees may actually lead to sprawl when unevenly adopted across regions. Developers may seek out jurisdictions that do not impose impact fees and “leapfrog” over those that do, thereby spurring development in other areas and not investing in affordable homes where they are needed most.

Revise Impact Fee Structures for Infill Development

Infill development and redevelopment in already urbanized areas may require only capital improvements to existing facilities, rather than the more expensive construction of new facilities, or, in areas with excess service capacity, may not require any new infrastructure investments at all.

By definition, infill development areas will be located in neighborhoods that already have basic infrastructure in place, while redevelopment projects may be in areas that have excess public service capacity. In both cases, requirements for new infrastructure investments will be lower than in greenfield development. To recognize this differential impact and encourage investment in already developed areas, some communities establish special infill or redevelopment service areas where impact fees are reduced or waived.

By varying impact fees, communities not only promote location-efficient development, but also help to enable the creation of new affordable homes in redeveloping areas. Mission-driven and nonprofit developers often operate on very narrow cost margins, and the reduction in impact fee levels can have a substantial impact on a project’s feasibility

In many areas, eligibility for reduced impact fees may not be sufficient incentive all by itself to drive new development to infill and redevelopment areas. Paired with other changes to the regulatory framework, however, equitable impact fees based on available infrastructure and services can be an important part of a regulatory framework that supports sustainable, location-efficient development.

Assess linkage fees on nonresidential development

Linkage fees are modest charges assessed on new nonresidential development, typically on a per-square-foot basis, to help offset local housing impacts and ensure that development of affordable homes keeps pace with local economic development and job growth. Fee revenue is usually deposited into a housing trust fund for use in accordance with local priorities, including in transit-oriented developments. In areas expecting commercial, industrial or retail growth following the introduction of a new transit station or line, linkage fees may be an effective strategy for ensuring that low- and moderate-income families have affordable housing options near these new jobs.

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