WHAT IS 'Impact Fee'

Impact fees are fees imposed on property developers by municipalities for new infrastructure that must be built or increased due to new property development. These fees are designed to offset the impact of additional development and residents on the municipality's infrastructure and services, which include the city's water and sewer network, police and fire protection services, schools and libraries.

These fees can also be levied against an individual or entity where its actions create an externality within a municipality. They are one-time charges for the creation of new infrastructure.

BREAKING DOWN 'Impact Fee'

Impact fees grew in popularity when taxpayers resisted a rise in property taxes to help fund the creation of new infrastructure. New infrastructure is sometimes paid through a special assessment tax, which passes the cost of new infrastructure and projects onto taxpayers within a designated district.

However, for people who already own property in an area seeing a lot of development, an impact fee paid by the developer is preferable. This is because the developer must then cover the cost of the new infrastructure necessitated by their development, rather than the individuals already living there.

Impact fees can sometimes be seen as disincentives to developers, since an impact fee can significantly raise the cost of a large construction project for the developer. Many people believe that this can also result in a loss of potential jobs in an area. However, research has shown that impact fees are significantly more efficient at raising revenue for infrastructure than the traditional method of collecting revenue through property taxes, which often fails to provide sufficient funding for municipal needs.

Impact fees also create a larger bank of land that can be developed. This is because impact fees take into account the cost of development and creating new infrastructure. A city may be densely populated and growing, but without the financing to build more homes and infrastructure, growth is limited. An impact fee allows a developer to pay for the cost of growth, which can help the city expand.

Examples of Impact Fees

Impact fees may be created by states or smaller municipalities. In the city of Oakland, California, impact fees exist on the creation of new construction. In one zone of Oakland, the impact fee for construction of a new single-unit dwelling through 2019 was $28,000. Of this, $23,000 went to a fund for affordable housing, $1,000 went to a fund for transportation and the other fees went to fund capital improvements.

Other municipalities throughout California use similar fee structures to support civic infrastructure and stabilize the housing market. California is home to some of the highest and most extensive impact fees in the U.S.

RELATED TERMS
  1. Brokerage Fee

    A brokerage fee is fee charged by a broker to execute transactions ...
  2. Bank Fees

    Bank fees are nominal fees for a variety of account set-up and ...
  3. Service Charge

    A service charge is a type of fee collected to pay for services ...
  4. Layered Fees

    Layered fees are a type of fee schedule that leaves investors ...
  5. Redemption Fee

    A redemption fee is a fee charged to an investor when shares ...
  6. Costs And Expenses

    Costs and expenses are the expenses associated with running a ...
Related Articles
  1. Investing

    Everything You Know About Investor Fees

    Investment fees are one of the main determinants of investment returns, and over time, minimizing fees tends to maximize performance. Use this guide today.
  2. Investing

    8 Investing Fees That You Should Never Pay

    In investment management and financial planning there are a plethora of fees that are unnecessary.
  3. Personal Finance

    Do You Know How Your Financial Advisor Is Paid?

    It is important to understand how your financial planner is compensated.
  4. Personal Finance

    Watch Out for "Junk" Mortgage Fees

    So many fees are tacked onto a mortgage, that it's easy to pay more than you have to.
  5. Investing

    Build Your Portfolio With Infrastructure Investments

    Mutual funds devoted to keeping roads, structures and communities safe can make you money.
  6. Investing

    Are Hidden Fees Eroding Your Participants’ Return?

    Plan sponsors need to know the fees associated with their plan to determine if they are reasonable.
  7. Retirement

    How a 1% Annual Fee Can Ruin Your Nest Egg

    What kind of impact does an annual 1% fee have on your portfolio? The answer may surprise you.
  8. IPF - Mortgage

    What Are Mortgage Closing Costs?

    Mortgage closing costs are unavoidable. Shop around – and closely compare your loan estimate to your closing disclosure – to save big bucks on fees.
  9. Personal Finance

    The Ins and Outs of Bank Fees

    These service charges could nickel-and-dime you right out of your nest egg.
  10. Retirement

    Stop Paying High Workplace Retirement Plan Fees

    Don't pay more in fees for your company-sponsored retirement plan than you have to.
RELATED FAQS
  1. What are typical trust fund management fees?

    Learn about trust fund management fees, such as the annual management fee, annual expense ratio, brokerage commissions, and ... Read Answer >>
Trading Center