The True Impact of Impact Fees

Being in the commercial real estate business for as long as I have, and being involved in the development process both as a broker and as a principal, I have had to deal with numerous municipalities on the matter of their impact fees. A lay person probably wouldn’t relate to the term (impact fees) so I thought I’d try to bring everyone up to speed on the subject.

 

Development impact fees have been born out of the notion that “growth should pay for itself”. Certainly that is a noble objective. If some developer wants to build a project that’s going to require a new school to be built or a fire or police station or a new sewage treatment plant, as an individual taxpayer, I don’t want to have to pay for that with my taxes. Growth has impact on the existing infrastructure of a municipality.

 

A definition of Development Impact Fees is “a one time charge assessed to new development.” The objective of these charges is to raise revenue for the construction or expansion of capital facilities (like schools, fire stations, etc) located outside the physical boundaries of the new development itself from which the new development in question will directly or indirectly benefit.

 

A lot of case law exists nationally on the efficacy of impact fees but suffice it to say there needs to be some rational correlation between the fee assessed and the actual cost of the incremental impact being generated. If you study impact fees from community to community, you will see a wide variation on this subject with some communities heavily buying into the notion or charging impact fees for everything from soup to nuts and other communities not so hung up on the idea.

 

Because of my orientation to talk about commercial real estate topics in this column, I think it is totally appropriate to point out that commercial developments and residential developments have different kinds of impacts in the real world. For example, commercial projects don’t create more kids in the schools like residential subdivisions or apartment complexes. The same is true for parks and libraries. The amount of water and sewer usage for general offices and retail uses is very low compared to residential subdivisions. In spite of these differences, I have seen communities (who shall remain nameless) who think it is appropriate to charge commercial developers certain impact fees even though their developments have zero impact on schools, parks and librairies.

 

I am not advocating for eliminating all impact fees for commercial developments…just fair and reasonable fees that can be justified by common sense (not greed). Besides impact fees, developers are saddled with so-called “tap on” fees to hook up to water and sewer systems as well as building permit fees which are often huge “soft costs” that factor heavily into the feasibility of the project. When the developer adds up the costs of impact fees, tap on fees and building permit fees and compares those line items in the development budget from one community to another, he may conclude that it’s more cost effective to build the project somewhere else. If this is what a town wants to do (discourage commercial developments) that’s well and good. But by not at least being competitive to the surrounding towns with whom you are competing for commercial projects, you are foregoing the benefits of potential sales tax revenue, jobs, increases to the real estate tax base, etc that a given commercial development would generate.

 

I think it’s fair to say that developer impact fees are here to stay. In and of itself, this is not a bad thing. In most cases, these fees have a good purpose. When used sensibly and appropriately, they are justifiable and beneficial. But if a town desires commercial development (and most do) it needs to periodically review the impact of their impact fees on the development process to make sure it is not giving out the wrong message and chasing away good development.

 

Bruce Kaplan is a Senior Broker Associate for Premier Commercial Realty. Email Bruce at brucek@premiercommercial realty.com.