Impact Fee

What Is an Impact Fee?

An impact fee is a one-time payment a city or county requires from a developer, or from a household building its own home, to cover part of the cost of public facilities that new growth needs. Common examples are fees for roads, water and sewer systems, schools, parks, libraries, and public safety buildings.

Local governments came to rely on impact fees as property and fuel taxes stopped keeping pace with infrastructure needs. A 2008 guidebook prepared for HUD notes that the money must go to new or expanded capital facilities. It cannot pay for operations, maintenance, or replacement.

How Impact Fees Work

A jurisdiction usually adopts a fee schedule based on a study of the facilities growth will require and what share of the cost each type of new home or building should bear. The fee is collected at permitting and kept in a dedicated fund.

Fees face constitutional limits. Under the Supreme Court’s Nollan and Dolan decisions, a condition placed on a building permit must have an “essential nexus” to the government’s land-use purpose. It must also be roughly proportional to the project’s impact. In Sheetz v. County of El Dorado, decided unanimously on April 12, 2024, the Court held that this test also applies to fees set by legislation. The case involved a $23,420 traffic fee charged on one house. The Court left open whether fees charged to a whole class of properties must be calculated as precisely as conditions placed on a single project.

Example

Suppose a town charges a flat $20,000 water and road fee on every new home. A 900-square-foot cottage and a 3,000-square-foot house pay the same amount, even though the larger home typically houses more people. The cottage buyer pays far more per square foot and per dollar of home value.

Why It Matters for Workforce Housing

Fees add directly to the cost of each new home. A 2018 Terner Center study of seven California cities found development fees of about $12,000 to $75,000 per multifamily unit. Fees on a single-family house came to between 6% and 18% of the local median home price. Those totals included impact fees and other charges.

The HUD guidebook calls flat per-unit fees “regressive,” because they charge smaller homes a disproportionate share of costs and fall hardest on lower-income buyers. Common remedies include:

• Scaling fees to home size
• Waiving or deferring fees for income-restricted homes
• Lowering fees for infill sites where infrastructure already exists

Supporters respond that, without impact fees, existing residents would pay for growth through higher taxes or lower service levels. That tension is why the design of the fees matters as much as their amount.