What are Impact Fees and how to they save YOU money?

Q: Why should we have impact (or “facility”) fees?

A: Impact fees are a means of providing for the growing needs of a community while alleviating the associated burden on existing residents. They are used in towns around the nation to help pay for infrastructure like roads, parks, water and sewer pipes, police and fire stations, and schools. Financing facilities with impact fees is based on the principle that since new development has a significant impact on community needs, developers should help pay for a portion of the cost of the additional infrastructure needed. Of course, we all still help for these needs, and impact fees simply help share the burden.

Impact fees can also be used to help encourage growth in the places a community desires it. For example, fees can be pro-rated to encourage new development in downtowns or in neighborhoods needing economic growth.

Q: But don’t property taxes paid for all that?

A: Property taxes form the major funding source for community facilities. But in very high-growth regions (like the Triangle), property taxes alone can’t keep up with the high demands for new facilities generated by new development. That’s because when growth is very rapid, capital costs of new infrastructure quickly outstrip what the existing tax base can generate.

To prevent massive borrowing and tax hikes, it’s can be a better policy choice to impose a fee on new development to help pay for new capital costs, while allocating property taxes to operations and maintenance funding. As growth speeds up or slows down from year to year, the funds generated also rise or fall – matching the need.

Impact fees follow the good fiscal policy of placing the financial burden on those who are generating the costs. This is known as the “user pays” principle. Since new construction generates the need for new parks and new roads, new development logically ought to carry a bit more of the burden than the general tax base. It serves as one useful funding tool to help pay for infrastructure.

Q: Will impact fees make housing less affordable?

A: This is an important question and there has been quite a bit of research by economists into the real effects of impact fees on housing price. For the most part, the studies conclude that impact fees are not a primary factor driving up housing costs.

Housing costs have much more to do with the market and the prevailing wage. Where wages are high, house prices tend to be high, and where wages are low, house prices tend to be low. That’s simply because builders and developers, by and large, charge for their product what people can afford to pay. The real estate community is very good at anticipating what people can afford in terms of monthly mortgage payments.

The real question about housing affordability goes directly to property taxes. For the great majority of homeowners, property taxes are included in the mortgage payment. If property taxes go up and up, that has a direct impact on affordability, and it’s money straight out of the homeowner’s pocket. Also, fees can be structured to have less effect on home buyers. Some communities have a tiered approach so that modest homes are assessed a lesser fee. Other places allow reimbursement of the fee to builders of affordable housing.

Q: What effect do impact fees have on existing homes?

A: If you’re the owner of an existing house, you benefit from impact fees, and you don’t have to pay them. And since no fee is assessed on existing houses, the value of the fee tends to be reflected in your home equity. A study by the Brookings Institution found that impact fees help support housing value, because they help guarantee that community services are in place and are adequately funded.

Remember, dwellings have value on the market because they are in communities served by infrastructure. Crumbling roads, jammed schools, and overcrowded parks don’t help sell houses or support your home equity. By the same token, good roads, good schools, and nearby parks and recreational facilities add to the price that buyers will pay for a home!