Impact Fee: Meaning, Overview, Examples in Real Estate Investing

What Is an Impact Fee?

Municipalities assess impact fees on property developers to pay for infrastructure improvements that must be built due to new property development. New development brings new residents, which can put strain on a city's infrastructure and services, including schools, libraries, water and sewerage, police and fire protection services. Impact fees are designed to offset the additional cost of maintaining these services.

Impact fees can also be levied when an individual or entity creates an externality within a municipality. They are one-time charges for the creation of new infrastructure.

Key Takeaways

  • An impact fee is typically a one-time payment imposed by a local government on a property developer.
  • The fee is meant to offset the financial impact a new development places on public infrastructure.
  • Public infrastructure includes roads, schools, parks, recreational facilities, water and sewerage, among other services.
  • Impact fees are determined based on the size of the new development, the cost of implementing it, and how much it will impact the surrounding area.

How an Impact Fee Works

Impact fees are a popular alternative to raising property taxes to pay for new infrastructure. New infrastructure is sometimes paid through a special assessment tax, which is levied against taxpayers within a designated district.

However, people who already own property in a rapidly developing area would rather see the developer pay an impact fee. This is because the developer is forced to cover the cost of new infrastructure necessitated by their development, rather than the taxpayers already living there.

Developers sometimes view impact fees as a disincentive to invest, as the fees can significantly raise the cost of a large construction project. This in turn can result in the loss of potential jobs in an area. However, research from the Brookings Institution disputes this notion. The research shows that impact fees are more efficient in raising revenue for infrastructure compared with 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 levied by states or municipalities. In California, the City of Oakland assesses residential and commercial impact fees on new construction. In Zone One, the builder of a new single-family dwelling must pay $28,000. Of this, $23,000 is earmarked for affordable housing, $4,000 goes to a capital improvement fund and $1,000 goes toward transportation. Oakland also charges a school impact fee of $3.48 per square foot for residential buildings.

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 impact fees in the United States.

Article Sources
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  1. The Brookings Institution. "Paying for Prosperity: Impact Fees and Job Growth." Accessed Nov. 11, 2020.

  2. City of Oakland. "Summary of City of Oakland Impact Fees," Page 1. Accessed Nov. 11, 2020.

  3. City of Oakland. "Impact Fees." Accessed Nov. 11, 2020.

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