List of Figures
List of Tables
This chapter provides an overview of two value capture techniques - impact fees and negotiated exactions - that involve a payment from the developer to the public agency to fund a portion of the infrastructure or services required for a new development.
Agencies may consider impact fees when a new development creates demands on existing infrastructure or municipal services.
Opportunities: Impact fees are economically efficient, relatively easy to implement, and create little public resistance. Because they are collected up front, public agencies can access these funds earlier than with incremental tax charges or property tax revenues.
Challenges: Impact fees are unlikely to fund the entire cost of the infrastructure or service required. In addition, it can be challenging to estimate the incremental cost impact of a new development. Impact fees also sometimes face resistance from developers and landowners.
Definition: Impact fees are charges imposed on developers by municipalities to help fund additional public services, infrastructure, or transportation facilities required due to the new development.
Alternative terms: In California 18 and Washington, impact fees are often known as mitigation fees; in Florida, as mobility fees; in Oregon, as system development charges; in Minnesota, as service availability charges; and in North Carolina, as facility fees. In States such as Kansas, Colorado, and Tennessee, impact fees are referred to as adequate facility taxes or excise taxes. 19 Developer contributions are also sometimes known as fair share fees.
Highways and Roads: Impact fees are common in highways and roads, as new residential or office developments create new demands on the connecting transportation networks. Development impact fees played a key role in funding the State Route 241 and 73 toll roads in Orange County, CA. 20
Transit: Impact fees are not as common in transit. Transit impact fee examples include Portland, OR's transportation system development charge; 21 Broward County, FL's transit concurrency fee; 22 Seattle, WA's transportation mitigation payment; 23 and Aventura, FL's transportation mitigation impact fee. 24
Other Sectors: Many counties and cities use impact fees to fund basic municipal services, including water and sewer, parks and recreation, police and fire protection services, street improvements, and schools and libraries.
Structure and Timing of Funds: Impact fees are generally one-time charges. They are typically imposed as a condition of approval of the development, either when the building or occupancy permit is issued. 25
Source and Use of Funds: The developer proposing the new development pays the impact fee with the intention that these are used to fund infrastructure or services required as a result of the development. Impact fees are typically used for capital expenses, although some jurisdictions allow them to be used for maintenance, repair, or replacement of existing facilities. 26
Management of Funds: Impact fees may be managed by different agencies, depending on purpose. Those related to the water or sewer system may need to be set by utility commissions, while transportation impact fees may be managed by transportation or public works departments. Impact fees should be segregated from the general fund and deposited in dedicated accounts and be used solely for allowable purposes.
Ease of Implementation: As one-time, standardized charges included in the development process, impact fees typically have low implementation costs. Nevertheless, an implementing agency should possess a robust framework for estimating the costs of development on existing infrastructure and services. This may be easier for greenfield projects 27 than for existing developments that create incremental cost impacts.
Enabling Legislation: While some States have explicit enabling legislation for impact fees, others have upheld municipalities' authority to charge fees. As of 2015, 29 States had enabling legislation. 28
Legal Basis: Impact fees should be reasonably related to the cost of service provided; they must have a "rational nexus" and "rough proportionality" to development impacts. 29 30 As with all value capture techniques, practitioners are advised to consult with legal counsel familiar with the case law in their State.
Challenges: Impact fees could discourage development by raising the cost. This could result in developers moving their projects - and the accompanying job growth and development - to jurisdictions where fees are lower. Impact fees may be easier to justify in robust real estate markets, where developers may be more willing to pay an additional levy to build a highly profitable development.
Opportunities: Because impact fees are applied similarly across all new developments within a jurisdiction, they help create a level playing field and predictability and certainty for the developer. In addition, research has shown that impact fees increase the supply of buildable land for developers. Without impact fees, municipalities may not be able to make the required investments in infrastructure to accommodate growth. Impact fees allow municipalities to pay for necessary water, sewer, and transportation infrastructure to open new parcels of land development. 31 In jurisdictions where impact fees have not been used before, municipalities have an opportunity to ensure that such charges are well received by developers by undertaking market research on how such charges were structured and received in other jurisdictions and by organizing discussions with developers to obtain their views related to the structuring of the fee.
Challenges: The public may not be aware of the benefits and challenges of impact fees, including by whom they are paid and for what they are intended, and they could be perceived as a new tax.
Opportunities: Because impact fees do not directly affect existing taxpayers, they are less likely to create public resistance. Impact fees may be appropriate in jurisdictions in which taxpayers oppose property tax increases on current residents to pay for new infrastructure.
Challenges: Impact fees do not necessarily address social equity concerns, such as whether the infrastructure or services will benefit low-income residents. Since they tend to limit property taxes on existing residents, they may have an indirect equity benefit. Implementing agencies may need to study these effects as part of the project development process.
Opportunities: Although impact fees may not fully offset new infrastructure costs, they directly link those paying for and those receiving benefits, promoting economic efficiency and equity. Impact fees also foster timely investments into local community infrastructure. Oregon's impact fees, known as transportation system development charges (TSDC), illustrate how impact fees can promote multimodal and equity considerations. TSDC revenues may only be used to fund projects that add capacity to the transportation system; benefit all parts of the city; meet the needs of diverse communities; and reflect projects that citizens want to see built. 32 In jurisdictions where impact fees have not been used before, municipalities have an opportunity to involve stakeholders in the structuring of the fee to ensure that revenues promote equity and community considerations.
The following examples highlight the successful use of impact fees to fund road infrastructure in rural and suburban environments.
Example 1: Osceola County Roadway and Bridge Program 33
Osceola County, FL, has taken advantage of transportation impact fees to facilitate construction of key bridge and roadway infrastructure for three decades. The fees were implemented in 1990 to address rapid growth in the county that had led to severe traffic issues and citizen frustration. The fees were suspended in 2011 and repealed in 2012 in response to an economic slowdown. In 2015, as growth picked up, the fees were re-implemented under the name "mobility fees," and changes were made to allow for faster collection. Transportation impact fees were collected once a building was occupied, while impact fees were collected when a building permit was issued. Therefore, governments could make roadway improvements before the arrival of new traffic. As the county's economy improved, mobility fees also increased. Between 2017 and 2018, single family home mobility fees increased from $4,585 to $8,671 and multifamily mobility fees increased from $3,203 per unit to $6,058 per unit. 34
Osceola County has leveraged mobility fees to streamline the delivery of critical transportation infrastructure through its $1 billion roadway and bridge program, which is entirely funded by impact fees. The county delivered 11 roadway projects, including 13 bridges, amounting to $350 million in capital expenditures within a year by using value capture funding in tandem with alternative contracting methods. This program has been touted as one of the most advanced in the United States and has allowed Osceola County to multiply the speed at which it delivers roadway infrastructure by 11 times. The program returned $80 million to the local economy in the first 4 months of construction and returned $36 million to the county's budget.
Example 2: Arapahoe County Rural Transportation Impact Fee 35 36
Impact fees are used throughout Colorado, as enabled by State legislation. Counties follow certain restrictions to implement impact fees:
Faced with rapid development, the Arapahoe County Board of Commissioners adopted a Rural Transportation Impact Fee in April 2017. The fee applies for unincorporated east county land and is collected upon permit issuance. Fees for residential developments range from $1,503 for a dwelling of 1,000 or fewer square feet to $3,118 for a dwelling of 2,901 square feet. Fees per 1,000 square feet for commercial, office, and industrial buildings are $3,806, $2,223, and $769, respectively. The county estimates it will generate $77 million for rural roads over 24 years from impact fees.
Example 3: San Francisco's Transportation Sustainability Fee
The city of San Francisco has several types of impact fees. The transportation sustainability fee is a citywide impact fee that addresses impacts by non-residential uses on the transit system. 37 38 39
The transportation impact development fee, the precursor to the transportation sustainability fee, was first established in 1981 after a rise in office developments in the 1970s increased the demand for transit. Although the transportation impact development fee was initially limited to funding growth in demand during peak hours and through the downtown, it was eventually applied to the entire city. The original transportation impact development fee preceded California's Mitigation Fee Act, which subsequently established a framework for identifying the impacts of new development on services and adopted impact fees to address those impacts. In 2015, the transportation impact development fee was replaced by the more expansive transportation sustainability fee, which is part of the city's broader transportation sustainability program.
Revenue generated by the transportation sustainability fee is directed to the San Francisco Municipal Transportation Agency (SFMTA) and can be used to fund capital and operating expenses imposed by new developments. An ordinance establishes the categories for which the revenues can be used and the percentage of revenues allocated to each category. SFMTA, along with other agencies, develops a 5-year spending plan for each of the categories identified in the ordinance.
The fee is assessed in proportion to the size of the new development, with residential, non-residential, and production distribution paying $7.74, $18.04, and $7.61 per square foot, respectively. 40 The fee is adjusted annually in accordance with California's Annual Infrastructure Construction Cost Inflation Estimate. To increase or modify the transportation sustainability fee, the San Francisco Board of Supervisors would need to approve an ordinance to amend the planning code. Impact fees are assessed by the planning department and collected upon permit issuance. The city code section establishing the transportation sustainability fee requires the SFMTA to update an economic feasibility study every 3 years, examining the impacts of the fee on development throughout the city. The city is also required to update its nexus study for the transportation sustainability fee every 5 years. 41
The transportation sustainability fee represents a small component of SFMTA's revenues and can be an unreliable funding source given year-to-year fluctuations. Nevertheless, the fee provides an important additional revenue stream. As compared to the transportation impact development fee, which generated about $24 million annually on average, the transportation sustainability fee is projected to add about $14 million per year, or $1.2 billion over 30 years. 42
A decision-making tool covering impact fees is shown in Section 4.2.9.
Agencies may consider negotiated exactions when a new development creates demands on existing infrastructure or municipal services.
Opportunities: Negotiated exactions are generally economically efficient and face less public resistance compared to other means of raising revenue. Because they are usually collected up front, public agencies can access the funds earlier.
Challenges: Negotiating favorable terms requires experience and resources. Depending on the negotiated terms, exactions may not cover the entire cost of infrastructure or services.
Definition: Negotiated exactions are charges imposed on developers to mitigate the cost of public services or infrastructure required as a result of the new development.
Alternative terms: Developer contributions or cash proffers.
Highways and Roads: Negotiated exactions are often used to fund local roads. Colorado's E-470 toll road, described in Appendix Section VI, is an example of highway developer land contributions.
Transit: Negotiated exactions-funded transit stations include the Portland, OR, Airport MAX Red Line; New York City Moynihan Train Hall; Washington, DC, NoMa-Gallaudet U Metrorail Station; and Alexandria, VA, Potomac Yard Metrorail Station. 43
Other Sectors: Negotiated exactions have been used to fund a range of infrastructure and services, including local roads, sidewalks, streetlights, and local water and sewer lines.
Structure and Timing of Funds: Negotiated exactions can be structured as one-time cash payments imposed as a condition for planning approvals or as in-kind contributions of land or infrastructure. 44 Because the implementing agency receives the funds up front, it can use them earlier than if it had to wait for incremental revenues generated as part of the development.
Source and Use of Funds: Exactions are paid by the developer responsible for the new development. Exactions are intended to contribute on-site infrastructure such as roads, parks, or other public infrastructure or services required due to the new development. Negotiated exactions usually fund capital costs.
Management of Funds: Exactions should be segregated from the general fund and deposited in dedicated accounts. They should be used solely for the purposes for which the fee is established.
Ease of Implementation: Negotiated exactions may be more challenging to implement than impact fees, because the implementing agency should have the skills to negotiate favorable terms with the developer. Successful use of exactions also requires that an implementing agency possess a robust framework for estimating the cost implications of the proposed development on infrastructure and services. This may be easier for greenfield projects than for existing developments that have incremental impacts.
Enabling Legislation: Similar to impact fees, local governments must have the statutory authority to impose exactions under State law. This authority can be granted explicitly through enabling legislation or through statutes. Some courts have upheld the concept of implied authority where enabling legislation for exactions did not exist. 45
Legal Basis: Negotiated exactions require evidence of a rational nexus and proportionality between the exaction and the services or infrastructure provided. 46 As with all value capture techniques, practitioners are advised to consult with legal counsel familiar with the case law in their State.
Challenges: Exactions could discourage developers by raising development costs. This could result in developers moving their projects - and the accompanying job growth and development - to jurisdictions where fees are lower or do not exist. That exactions may not be applied similarly across projects may also reduce market interest. Finally, exactions may be easier to justify in robust markets, where developers may be more willing to pay an additional fee to build a profitable development.
Opportunities: Exactions allow municipalities to pay for necessary infrastructure, potentially creating opportunities to open land for development. 47 In jurisdictions where negotiated exactions have not been used before, municipalities have an opportunity to ensure that such charges are well received by undertaking market research on how such charges were structured and received in other jurisdictions and by organizing discussions with developers to obtain their views related to the structuring of the fee.
Challenges: Because exactions are not standardized and are negotiated on a case-by-case basis, they could be subject to accusations of misuse if fees are not subject to a transparent and accountable process.
Opportunities: Like impact fees, negotiated exactions typically face limited public resistance, because they shift the costs of new improvements to developers. 48 Exactions may therefore be appropriate in jurisdictions where property tax increases, SADs, or TIF techniques face public opposition.
Challenges: Negotiated exactions do not automatically address social equity concerns, such as whether the infrastructure or services will benefit low-income residents. Implementing agencies may need to study these effects as part of the project development process.
Opportunities: Negotiated exactions promote economic efficiency by allocating the costs of a new development to the developer that generates them. They can also promote equity considerations by providing benefits to the developer, the local government, and residents. 49 Similar to impact fees, negotiated exactions also present the opportunity to increase perceived equity among stakeholders. For new projects, municipalities have an opportunity to organize discussions with stakeholders during the early planning stages to ensure charges are structured to benefit the local community.
For examples where negotiated exactions have been used, refer to the Portland, OR, Airport MAX Red Line; New York City Moynihan Train Hall; Washington, DC, NoMa-Gallaudet U Metrorail Station; and Alexandria, VA, Potomac Yard Metrorail Station. 50
Implementing agencies can use the decision-making tool in Table 6 to assess the appropriateness of impact fees and/or negotiated exactions.
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18 "Mitigation Fees for New Development," Marina, CA, Municipal Code, www.codepublishing.com/CA/Marina/html/Marina03/Marina0326.html.
19 Shishir Mathur and Adam Smith, "Transit Impact Fee: Enabling Statutes and Equity Concerns," Transportation Research Record: Journal of the Transportation Research Board, No. 2346, Transportation Research Board of the National Academies, Washington, DC, 2013, pp. 13-22.
20 For more information, refer to the website of Orange County, CA: thetollroads.com/about/development.
21 For more information, refer to the website of the Portland Bureau of Transportation: https://www.portlandoregon.gov/transportation/46210.
22 For more information, refer to the website of Broward County, FL: www.broward.org/Planning/Development/FAQs/Pages/Transportation-Concurrency.aspx.
23 City of Seattle, Department of Construction and Inspections, Transportation Mitigation Payments: South Lake Union and Northgate, 2012, www.seattle.gov/DPD/Publications/CAM/CAM243.pdf.
24 Mathur and Smith, "Transit Impact Fee: Enabling Statutes and Equity Concerns."
25 "APA Policy Guide on Impact Fees," American Planning Association, www.planning.org/policy/guides/adopted/impactfees.htm. For an example, see the website of Thurston County, WA: https://www.co.thurston.wa.us/permitting/impact/impact_home.html.
26 For example, in "Transit Impact Fee: Enabling Statutes and Equity Concerns," Mathur and Smith found that several jurisdictions had also used the fee to fund O&M costs.
27 A greenfield project refers to a new infrastructure investment. Typically, a greenfield investment is made on unused land, with no constraints from prior buildings or facilities. In contrast, a brownfield project refers to an investment (an upgrade, modification, etc.) on existing infrastructure facilities.
28 Florida municipalities, for example, applied impact fees for many years without State legislation, which was finally enacted in 2006. Maryland, Tennessee, and North Carolina do not have enabling acts, therefore legislative authority is required each time a municipality seeks to charge impact fees. Clancy Mullen, State Impact Fee Enabling Acts, Duncan Associates, January 2015, impactfees.com/publications%20pdf/state_enabling_acts.pdf.
29 These concepts come from case law, including the U.S. Supreme Court decisions in Koontz v. St. Johns River Water Management District, 570 U.S. 595, 614 (2013), Nollan v. California Coastal Commission, 483 U.S. 825 (1987), and Dolan v. City of Tigard, 512 U.S. 374 (1994). The "rational nexus" test requires that the local government demonstrate a reasonable connection between the need for the additional infrastructure investment, the cost of that additional infrastructure, and the benefit that accrues as a result of the additional infrastructure. The "rough proportionality" test requires demonstrating that the exaction or fee charged is proportional to the impact of the proposed development.
30 Mathur and Smith, "Transit Impact Fee: Enabling Statutes and Equity Concerns."
31 Arthur Nelson and Mitch Moody, "Paying for Prosperity: Impact Fees and Job Growth," The Brookings Institution, June 1, 2003, www.brookings.edu/research/paying-for-prosperity-impact-fees-and-job-growth/2.
32 Portland, OR's TSDC program generated over $129 million between 1997 and 2017 for projects including new street connections, intersections, sidewalks, bike lanes, and transit enhancements. TSDC funds are not allowed to fund preventive maintenance, pothole repairs, minor operational changes, etc. For more information, refer to Portland's website: www.portlandoregon.gov/transportation/article/668271.
33 Ken Atkins, "Case Study - Osceola County, Florida." EDC-5: Technical Support for FHWA Initiative to Promote Adoption of Value Capture to Deliver Highway Projects - Albany Summit, October 24, 2018.
34 Brian McBride, "Mobility Fees for Osceola Developers Nearly Double," Osceola News-Gazette, January 12, 2018.
35 "Rural Transportation Impact Fee," Arapahoe County, CO, 2016, www.arapahoegov.com/1629/Rural-Transportation-Impact-Fee.
36 "Transportation Impact Fees in Colorado," Arapahoe County, CO, n.d., www.arapahoegov.com/1668/Transportation-Impact-Fees-in-Colorado.
37 San Francisco Planning Department, An Overview of Development Impact Fees, December 2014, default.sfplanning.org/publications_reports/DirectorsBulletin01_Impact_Fees-April2016.pdf.
38 San Francisco Planning Department, New Planning Code Transit Impact Development Fee Update, January 2013, www.sfplanning.org/ftp/files/legislative_changes/new_code_summaries/120523_TIDF_Transportation_Impact_Development_Fee_Update.pdf.
39 San Francisco Municipal Transportation Agency, Transportation Sustainability Fee (TSF) - Increase, October 2017, www.sftransportation2045.com/sites/default/files/pdfs/Fact_Sheets/H.%20TSF%20Increase.pdf.
40 San Francisco Planning Department, Transportation Sustainability Fee, July 2015, default.sfplanning.org/plans-and-programs/emerging_issues/tsp/tsp_TSF_Fact_Sheet_072115.pdf.
41 San Francisco Municipal Transportation Agency, San Francisco Transportation Sustainability Fee Nexus Study, May 2015, default.sfplanning.org/plans-and-programs/emerging_issues/tsp/TSF_NexusStudy_May2015.pdf.
42 San Francisco Planning Department, INVEST: Transportation Sustainability Fee, sfplanning.org/invest-transportation-sustainability-fee.
43 "Negotiated Exactions," Federal Highway Administration, Center for Innovative Finance Support, www.fhwa.dot.gov/ipd/value_capture/defined/negotiated_exactions.aspx.
44 Sharada Vadali, Using the Economic Value Created by Transportation to Fund Transportation (National Academies Press, 2014), www.nap.edu/catalog/22382.
45 Jennifer Evans-Cowley, Development Exactions: Process and Planning Issues, Lincoln Institute of Land Policy Working Paper, 2006, www.impactfees.com/publications pdf/evans-cowley-planning.pdf.
46 Vadali, Using the Economic Value Created by Transportation to Fund Transportation.
47 Nelson and Moody, "Paying for Prosperity."
48 Robert Johns et al., Harnessing Value for Transportation Investment. Minnesota University Center for Transportation Studies, 2009.
49 Johns et al., Harnessing Value for Transportation Investment.
50 Federal Highway Administration, "Negotiated Exactions."
