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Chapter 5. Nexus Studeies and Fee Structuring

5.1 Nexus Studies and Development Feasibility

This section first reviews current practices for conducting nexus studies, which jurisdictions commonly used to set fee amounts proportional to project impacts, and then presents how public agencies could consider the effect of these fees on development project feasibility to guard against unreasonable fee levels that may discourage new developments.⁵⁵

5.1.1 Nexus Studies

Public agencies commission nexus, or fee, studies to substantiate that the types and amounts of impact fees charged on new developments meet the legally defensible nexus/proportionality standard. Because they can be costly and often complex, these studies are typically conducted for program-level assessments when public agencies are interested in establishing an overall DIF program that can be legislatively enacted. At the program level, and as presented in chapter 4, the pertinent legal requisite is a broad reasonable relationship standard that fee amounts must be arguably reasonable, relative to the impacts of new developments.

All exactions (inclusive of DIFs), whether ad hoc or legislatively enacted, are likely supported by findings that demonstrate the proper relationship between the impact created and the fee exacted. Findings are an opportunity for the government agency imposing the DIF to explain why the fees are necessary, what impacts new developments create, how new developments impact the existing communities, and how the collection of fees will alleviate all or a portion of these impacts. Failure to make the proper findings may result in an invalidation of the fees in the case of a court challenge, and nexus studies provide means to reach proper findings.

Public agencies typically categorize DIFs based on the services they fund, which could include one or more the following general categories:

• Transportation fees for costs of expanding transportation infrastructure, including roads, transit, and other multimodal facilities and systems (bicycles, pedestrians, transportation demand management [TDM], etc.).
• Utility impact fees for expansions of water, sewer, electricity, and gas infrastructure.
• Park fees for parks, parkland, trails, and other open space facilities.
• Environmental fees for environmental mitigation programs.
• Fire and public safety fees for expanding the police, fire, and other public safety and emergency response systems.
• School/library fees for expanding schools and library resources.
• Affordable housing⁵⁶ fees that are earmarked for developing affordable housing needed to complement market-rate housing growth.
• Other public building/facility fees for any expansions of city facilities, such as facilities for general administration, health and human services, and public works.

Nexus studies can be conducted for a specific category, such as transportation fees, or for multiple categories depending on public agencies’ goals regarding the extent of the DIF program they want to establish.

Although most State DIF statutes require that local agencies determine the reasonableness of fees charged to development projects, there are no set standards or parameters regarding how policymakers and consultants reach conclusions of reasonableness. Nexus study consultants often use best practices based on overall industry experience, but no specific industry standards currently exist. There are wide variations in methodologies across localities, consultants, and types of fees. Although no specific methodology is identified in State or local statutes regarding nexus studies, most studies follow a similar structure. For residential developments, for example, a recent survey of nexus studies that cities in California conducted indicate that there are two general approaches: the plan-based method and the level-of-service method (Raetz, Garcia, and Decker 2019, 51–52).

In the most common, plan-based method, a nexus is determined by assessing the infrastructure needed to serve a future population based on growth estimates, and it involves the following broad steps (see chapter 7 for a specific example):

• Identify the future demand for services, often based on estimates from official planning documents, such as a GP or relevant estimates from MPO.
• Identify the public facilities needed to meet this demand for service, and estimate the cost to provide these facilities.
• Subtract other sources of revenue that will be used to provide the same facilities to determine a net facilities cost.
• Choose a demand variable (e.g., post meridian [PM] peak hour [PH] vehicle trips), and apply variable rates (e.g., trip generation rate) to various land uses (e.g., residential, nonresidential).
• Calculate total future demand (i.e., total PM PH vehicle trips) by summing up across all land uses.
• Divide the net facilities cost by total demand to determine the unit cost per demand variable (e.g., average cost per PM PH vehicle trip).
• Apply unit cost to each land use demand variable to determine impact fee schedule by different uses (e.g., $/DU for single and multifamily and $/1,000 ft2 for office, retail, and industrial uses).

In the LOS method, a nexus is determined by identifying an LOS standard (either existing or desired) that a municipality would like to achieve or maintain in the future. Local agencies generally have full authority to determine the desired LOS for infrastructure for their jurisdiction under State DIF statutes. This method involves the following broad steps:

• Define an LOS standard (e.g., number of firefighters per 1,000 resident or LOS D⁵⁷ for roads) often identified in an official document such as a GP.
• Use current replacement costs pertaining to the LOS standard to determine the incremental public facility cost standard, reduced by subtracting other sources of revenues that will be used to provide the facilities.
• Choose a demand variable (e.g., residents served, trips generated), and apply variable rates to various land uses (e.g., residential, commercial, retail).
• Multiply each land use demand variable by the cost for each incremental facility standard to determine fee schedule by land use.

Especially for the plan-based method, nexus studies often link impact fees directly to public improvement projects identified in a CIP tied to a GP. However, these studies do not always include an analysis of CIPs as a basis for project impacts. In California, for example, the MFA recommends that local jurisdictions link their impact fees directly to projects identified in a CIP, but the language is nonbinding. Better integrating CIPs in nexus studies would ensure that fees are directly tied to defined projects at the local level. Nexus studies based on CIPs can facilitate making the required findings, which are integral to the local ordinance that establishes the DIF program.

5.1.2 Effect on Development Feasibility

Development feasibility is aimed at assessing whether the imposition of DIFs on a new development project can negatively impact its financial feasibility to the extent that the developer decides not to proceed with the project.

Nexus studies are ultimately about setting maximum and legally defensible fee amounts based on the relationship between new developments and increased usage of public facilities. Public agencies often choose to set their fees below this ceiling in an effort to ease concerns about dampening new developments. The ultimate decision on fee levels is often driven by public agencies’ funding priorities based on their infrastructure needs and the potential effect of the fees on development feasibility based on local real estate markets.⁵⁸ In some cases, public agencies intentionally lower the LOS standards (and, as a result, lower their public facility needs) in their nexus studies to help improve the feasibility of new developments by lowering the fee amount.⁵⁹

As presented, a variety of methods is used in nexus studies to estimate maximum fee amounts, but these studies generally do not address development feasibility concerns regarding the fees. Public agencies generally attempt to make reasonable decisions when setting the final fee levels with limited information on development feasibility. The rigor in development feasibility analysis can impact the extent to which achieving optimum fee revenues can occur without hindering new developments. The depth of feasibility analysis undertaken beyond the nexus studies is often a function of local resources available. In general, public agencies choose one of the following options in addressing development feasibility:

1. Use more informal methods, rather than commissioning analysis beyond a nexus study, such as using working groups with knowledge of the local development process to inform their final decisions.
2. Rely on analysis of fees charged in adjacent jurisdictions as a proxy for development feasibility in their own jurisdiction.
3. Rely on full feasibility analyses to determine the amount of fees that the market can bear without slowing or stopping new developments.

Most local agencies choose the second option, which is often not a preferred approach because real estate markets are highly localized and new development potential can differ dramatically between jurisdictions. This approach also does not take into account other sources of revenue that nearby jurisdictions may be leveraging to finance certain infrastructure needs (e.g., higher property taxes).⁶⁰ To account for this variation in revenue, some local agencies conduct an infrastructure burden cost analysis that can provide a more in-depth view into how adjacent jurisdictions pay for their infrastructure (Raetz, Garcia, and Decker 2019, 56). However, such an analysis does not examine market conditions and still has shortcomings regarding what the development market can bear.

The most robust and reliable analysis is a separate feasibility study, which determines the total fee amount that could be charged without slowing or stopping new development from taking place. Such studies are sometimes conducted for implementing affordable housing impact fees or new inclusionary zoning requirements. In these feasibility studies, real estate consultants assess a range of prototypical projects (e.g., mid-rise projects, townhomes, single-family homes, etc.), sometimes for submarkets within a jurisdiction, to see how the fee levels affect the development feasibility across different project types and locations (Raetz, Garcia, and Decker 2019, 56).

Although most public agencies make good-faith efforts to consider feasibility, the majority are not conducting analyses robust enough to fully account for the impacts that fees have on new developments. One of the main concerns is about the added expense of feasibility studies, particularly for those jurisdictions with limited resources.⁶¹ Less-resourced jurisdictions may see less value in impact fees if they are too expensive to implement. As a result, they may choose not to actively incentivize new developments or be encouraged to shift to less regulated type of exactions from new developments, such as development agreements that are negotiated. It has also been found that multiple jurisdictions can combine their funds and efforts to conduct combined nexus and feasibility studies to lower the costs of these studies.⁶²

5.2 Fee Design and Structuring

The way in which public agencies design and structure impact fees can address important proportionality concerns—that is, the extent to which fees accurately reflect the cost of development impacts—while also helping to incentivize those developments that are consistent with their overall land use and planning goals (e.g., more dense multifamily housing rather than large single-family homes). From a practical standpoint, public agencies make many decisions in the fee design process, and the resulting DIF program will likely depend on the details of those decisions. Broadly, the design and structuring DIF program would entail the following basic elements:

• Defining service area and addressing geographical or locational concerns.
• Establishing LOS standards appropriate for infrastructure category under consideration.
• Determining the basis for fee structuring, typically as relates to the use characteristics of the specific structure (e.g., multifamily housing, office building) under consideration.
• Addressing other concerns, such as interjurisdictional issues, the need for incentives and exceptions, and the effect of real estate market conditions.

As presented, impact fee structures can vary significantly for different public facility categories (e.g., roads, water/sewer, parks, schools/libraries, police/fire, affordable housing), and fees must, therefore, correspond separately for each category. Although all fees are essentially based on use characteristics of a specific structure under consideration, other external factors may affect costs for some fee categories. For example, for a single-family house:

• Costs of roads per house will reflect the internal roads built primarily for that house as well as other offsite improvements (e.g., access roads, intersections) that are built to serve groups of homes in the same area.
• Costs of water, sewer, and stormwater facilities can vary significantly based on distance from the house to the central facility as well as on the overall density of homes near the target home.
• Costs of police and fire services may also depend to some degree on the distance from a house to the police or fire station.

5.2.1 Defining Service Areas—Locational Characteristics

Impact fee practice generally requires that the fees collected in a service area are spent in that area. However, public agencies have some flexibility in setting the service area. As a matter of practice, the larger the service area, the more flexibility there is in spending the revenue where (and when) it is needed most. Service areas that are too small and/or too numerous can result in insufficient revenues all around. Many services—such as police, fire, and public safety—act as a system in serving the entire jurisdiction. Even though it may be easiest to design and administer one service area for an entire jurisdiction, it is also important to consider refining the service area design and fee structure in ways that minimize public facility costs and promote the underlying land use planning goals (HUD 2008, 54).

Public agencies often rely on geographically specific impact fees to account for variations in infrastructure costs. If the infrastructure needed to serve growth in one large part of the community is already in place, but substantial new investment is needed in another, then local agencies may draw service areas reflecting this (HUD 2008, 54). In this case, service areas can be based on the extent of the existing infrastructure and local agencies can apply marginal cost pricing. Although average pricing for fees takes into account the total cost of development impacts over an entire jurisdiction, marginal cost pricing takes into account the infrastructure cost of one additional unit of development. This approach to pricing has been shown to result in more efficient development, reducing the need for permit issuance in the urban fringe and limiting sprawl (HUD 2008, 18).

For example, the urban core may have lower costs because a new development can plug into existing sewer, water, and road systems, whereas a development in a typical greenfield area would have much higher infrastructure costs. Public agencies already rely on neighborhood-level fees to differentiate fee rates between (1) areas with greenfield development in which infrastructure may need to be built from scratch and (2) infill developments, which can often rely on less costly updates to current infrastructure. When cities and counties refrain from differentiating their rates for greenfield and infill development, they can run the risk of overcharging developments with lower impacts by averaging costs across a larger region.

Two good examples regarding geographic-specific fee structures are Albuquerque and San Diego (HUD 2008, 78). Albuquerque established impact fees that went into effect in 2005 based on three tiers—fully served, partially served, and unserved—to recognize that some areas already had most or all of the infrastructure needed to serve new developments, including infill and redevelopment opportunities, whereas other areas did not. San Diego currently has more than 40 community planning areas, each with their own fee amount set to reflect the different infrastructure cost levels for greenfield and infill developments.⁶³

In addition to existing infrastructure, service areas and geographic-specific impact fee structures can also be based on proximity to public transit systems. For example, in the early 1990s, Atlanta was the first city in the nation to reduce road impact fees for development near heavy-rail transit stations. Recognizing the reduced impact with public transit, the city reduced road impact fees by 50 percent for all multifamily communities within one-quarter mile of rail transit stations and 25 percent for developments between one-quarter and one-half miles (HUD 2008, 56).

High-density, mixed-use developments can also reduce road impacts. Some studies of mixed-use projects show up to a 40 percent reduction in road impacts (HUD 2008, 107). When living, working, shopping services are all nearby, people need fewer car trips and the distance traveled is reduced. Also, according to the National Household Travel Survey, as density increases, vehicle miles traveled (VMT) per person generally decreases (HUD 2008, 57). Further reductions can result from the presence of public transit.⁶⁴ Since impact fee levels for transportation facilities are among the highest, density-based reductions help assure that such fees do not adversely impact new developments.

More generally, many jurisdictions have special developments at subdivisional level or SPs that are separate and distinct from their GPs. These SPs generally have their own land use and zoning standards and often involve transit-oriented developments (TODs) based on smart, high-density growth patterns and goals. Many public agencies design impact fee structures for geographic areas covered under the SPs separate from the rest of their jurisdictions. Chapter 7 will present, as a case example, the City of East Palo Alto’s two-tier impact fee structure, one for the area covered by the city’s Ravenswood TOD SP and the other covering the rest of the city.

Service areas can also be designed to take into account the availability of alternative funding sources. There are circumstances when parts of a jurisdiction already have the revenue stream needed to assure adequate public facilities. For example, in Texas, special municipal service districts (e.g., municipal utility districts) generate their own revenue to construct and maintain facilities. In Florida, many developments of regional impact form local improvement districts for the same purpose. Other specialized arrangements, such as TIF districts and various forms of SADs, also provide alternative revenue sources. Locally generated revenue may be sufficient in these areas to finance public facility needs for new developments.

Although these alternative mechanisms are available to fund the same facilities that impact fees would, local agencies may draw service areas to exclude them or could draft DIF ordinances to exempt them from impact fee assessments (HUD 2008, 55).⁶⁵ This kind of service area design may be appropriate for only those facilities that have a relatively predictable revenue stream dedicated to them (such as roads supported by dedicated gasoline taxes).

5.2.2 Establishing LOS Standards

Establishing LOS standards or goals for infrastructure, whether for roads or other categories, that serve new developments is one of the most critical elements in determining new public facility needs. In State DIF statutes, aside from any State and/or Federal guidelines that may apply, local agencies generally have full authority to determine the desired LOS standards for different public facilities in their jurisdictions. Although it is common to adopt the same LOS standard across an entire jurisdiction—such as LOS D for roads, or 3.5 acres of park per 1,000 residents—this need not be the case. Past, present, or future development patterns and constraints, combined with local growth and land use policies, often provide a rational basis for variable LOS standards.

For roads, it is not unusual for cities and counties to have an LOS D for highways in urban areas and LOS C for suburban and rural areas. Urban areas are more prone to congestion than nonurban areas, and the cost to maintain the same LOS could discourage new developments closer in (HUD 2008, 56). Variable LOS standards, however, may not be suitable for facilities such as water/wastewater, libraries, or schools that serve the entire jurisdiction and where vertical (social) equity is essential.

It is also important to note that, if a higher LOS is adopted in an area, public facilities should be brought up to the new standard through revenue from sources other than impact fees to ensure that the rational nexus requirement is not breached. Although it is reasonable to expect new developments to pay for a portion of new public facility costs, if localities have very high current LOS or set high LOS goals, they are effectively asking newcomers to pay a cost of entry to their communities by levying the costs on new developments based on those standards (Raetz, Garcia, and Decker 2019, 53). Setting high LOS standards and transferring those costs to impact fees can also prove exclusionary if the fees increase local property prices.

5.2.3 Determining the Fee Basis—Use Characteristics

Once delineation of geographic-specific service areas has occurred, the next challenge is to determine a set of standard fee schedules for each service area based on the LOS standards pertinent to the infrastructure being created in that service area. As presented, different fee schedules are generally established for different public facility categories. Within each facility category, standard fee schedules are developed by land use and type of structure—differentiated in terms of residential (single-family, multifamily) and nonresidential (office, retail, industrial). For most categories, the basis of impact fees are per DU for residential-use types and per 1,000 ft2 of floor space for nonresidential-use types. The basis for fees is tied to the units of demand that best reflect different levels of need they generate on public facilities. They are intended to represent the lowest common denominator for impacts upon which a uniform schedule can be developed (without having to create additional layers of fee schedules) that can sufficiently address the proportionality concerns.

For roads, impact fees are typically based on the numbers of trips generated or VMT per DU for single- and multifamily housing and per 1,000 ft2 for office, retail, and industrial structures. These demand variables are linked directly to incremental public facility costs to determine the unit impact fees in terms of $/DU for residential and $/1,000 ft2 of nonresidential uses (see chapter 7 for more information on how transportation impact fees are determined). Table 3 provides different fee schedule bases for different public facility types used in a recent nexus study for the City of East Palo Alto.

Particularly for residential developments, there has been a great deal of research and discussion about whether per DU properly represents the impact fee basis and whether other measures, such as per square footage or per number of bedrooms, better address the proportionality concerns both from a horizontal and vertical equity standpoint. Although per DU is used predominantly, HUD recommends the size (i.e., per square footage) as the preferred basis of impact fees for residential developments (see sidebar 5.1; HUD 2008, 44).⁶⁶

 

5.2.4 Inter-Jurisdictional Issues and Other Considerations

When infrastructure needs transcend jurisdictional boundaries, inter-jurisdictional fees can provide a streamlined way to mitigate impacts. These fees also offer a way for less-resourced localities to leverage fees for infrastructure funding. In recent years, some public agencies have come up with innovative ways to better capture the impact of new  developments that cross-jurisdictional boundaries (see sidebar 5.2). Although there may be concerns about nexus precisions (i.e., the extent to which fees are proportional and directly linked to impacts generated for different infrastructure categories and geographic areas), particularly those covering broad swaths of land, public agencies have generally designed inter-jurisdictional fees to target an area with more homogeneous costs (Raetz, Garcia, and Decker 2019, 48).

In West Riverside County, California, many households live in one town and commute to work in another, creating a type of “ commute shed.” While hometowns benefit from fees on new developments, those funds can only be spent within the hometown boundaries. The Western Riverside Council of Governments (WRCOG) collects transportation uniform mitigation fees from new developments throughoutthe WRCOG’s boundaries and redistributes that funding to reimburse local agencies for transportation improvements within the broader commute shed.

Similarly, the Sacramento Area Council of Governments and three of its member cities have partnered with California DOT to establish a mandatory fee on new developments, targeting a region that relies on a section of the Interstate 5 (I-5) corridor as part of the I-5 Subregional Corridor Mitigation Program. To better reflect variations in traffic and freeway usage patterns, the fee program has four distinct fee districts with different fee schedules. These regional fees provide a path for less-resourced communities to assess and implement impact fees within their own jurisdictions while addressing the broader impacts of new developments across multiple jurisdictions.

Various incentives and exceptions are sometimes incorporated into fee structuring to serve several purposes, including promoting overall land use policy goals (e.g., high-density TOD), rectifying vertical inequity situations (e.g., general affordability concerns with higher impact fees), or accounting for reduced impacts (e.g., areas where traffic demand management can be implemented). These incentives and exceptions can be situation-specific or more programmatic in nature. Programmatic incentives associated with geographic specificity were covered in section 5.2.1, and programmatic exceptions associated with remedying vertical inequities were covered in section 3.2, in the form of exemptions, exclusions, waivers, and deferments. As presented, local agencies grant (1) exemptions when a new development does not create a new impact, (2) exclusions when alternative revenues are available, (3) waivers to promote local policy goals (such as affordable housing), and (4) deferments to reduce early phase risks to developers and developments.

Finally, some of the variance in impact fee rates between localities reflects the differences in real estate markets. Public agencies sometimes set their fees higher, assuming that developers will be able to cover the costs due to healthy real estate market and overall high property prices. Structuring the fees according to local housing markets can ease the impact of fees on weaker submarkets. Also, rather than applying the full amount of a fee or fee increase when approved, localities can stage implementation in steps over a period of time to give the housing and land markets a chance to adjust to the higher cost of development.

5.3 Timing of Fee Payments

Numerous State DIF statues specify the timing of when impact fee assessments and collections can occur. Others are silent and, in States without DIF enabling acts, the timing of payment is mostly a local option. The two critical timing issues are (1) the point of fee assessment (i.e., fee imposition) and (2) the point of fee collection. Sometimes they are simultaneous, such as being assessed and collected with the building permit, perhaps the most common approach, because it is the most efficient administratively. It is also the earliest point during the development process when the expected impacts of a new development are best known. At that stage, the assessed and collected impact fees increase the chance that fees will flow into new or expanded infrastructure roughly concurrent with the impacts of new development (HUD 2008, 60).

Some public agencies assess and collect impact fees at the end of the development process, during the final inspection or issuance of the certificate of occupancy (CO). This has the advantage of preventing the developer from incurring financing costs on the period between the impact fee payment at the building permit stage and sale of the property. When a property is held for rental, it allows the developer to finance the fee with lower cost take-out financing, the long-term or permanent financing that replaces interim or construction financing. A variant on this approach is assessing impact fees at the building permit stage but collecting them at the final inspection or CO stage. This has the advantage of allowing the local government to budget for the revenue before it is paid, and it provides the developer with increased certainty on the amount (HUD 2008, 61).

5.3.1 Fee Imposition

The timing of fee imposition—the point in the entitlement and development process when the calculation and assessment of impact fees occur—can be just as important to developers as the feasibility of fee estimation. The sooner developers know their fee costs, the sooner they can estimate a project’s overall costs and feasibility. Local agencies, on the other hand, prefer setting fee amounts later in the development process to better capture the most up-to-date fee rate. Local agencies also impose fees later to help capture the up-to-date impacts of new developments that experience delays in the period between building permit review and construction (Raetz, Garcia, and Decker 2019, 31).

The most recent surveys of cities and counties in California indicate that fees are typically imposed at the time of building permit application or building permit issuance (Raetz, Garcia, and Decker 2019, 32). However, there were other variations—such as fees imposed at the time of construction plan review or at issuance of the CO. Some cities, such as Oakland, had a more complex multilayered imposition schedule (see sidebar 5.3).

The surveys also found that there is often a lag between project approvals and when actual development takes place (Raetz, Garcia, and Decker 2019, 33). Several years can pass between permitting, building approvals, and the actual construction of a building because of project-specific or market changes, such as a recession. In some cases, a developer may substantially revise the project, which could result in substantive changes to the development project scope and public facility impacts. Local agencies impose fee amounts later in the development process to better insulate against these types of changes in scope. In contrast, developers want to set fee amounts earlier to lower the risk of substantial cost increases during the development process.⁶⁷ Lowering the risk of cost increases delivers more certainty to investing institutions, increasing access to funding and lowering the contingency needed, reducing overall carrying costs (Raetz, Garcia, and Decker 2019, 33).

5.3.2 Fee Collection

From developers’ perspectives, the timing of fee collection is important because spending money earlier in the development process results in a longer period between fee outlay and occupancy, when revenue begins to flow back to the developer. When local agencies prolong this window, developers must incur carrying costs over a longer period of time, which often requires paying out of pocket because many banks will not close financing on a project until permit issuance. Because of this dynamic, paying fees early in the development process may be difficult for smaller developers without capital on hand.

From the perspective of a local jurisdiction, however, some fees may be more important to collect early to cover more immediate costs. For example, collecting transportation or utility impact fees may be needed before occupancy to fund timely construction of the street improvements required to serve the residents of a new development. Most local governments ask for payment at the time of either building permit issuance or CO, but the difference between these two stages includes construction, which can take a long time.⁶⁸ Developers argue that the additional carrying costs can increase the overall price of properties.

Some State DIF statutes restrict when localities may require developers to pay impact fees. In California, for example, local jurisdictions may not require developers to pay fees until the issuance of a CO or the date of final inspection, whichever happens first. However, there are exceptions if they determine “that the fees or charges will be collected for public improvements or facilities for which an account has been established and funds appropriated and for which the local agency has adopted a proposed construction schedule or plan or used the fees to reimburse for expenditures.” (Raetz, Garcia, and Decker 2019, 34).

In the same surveys presented earlier, it was found that most cities and counties surveyed collect impact fees at the time of building permit issuance, although timing can vary according to the fee (Raetz, Garcia, and Decker 2019, 34). A minority of jurisdictions collect fee payments at the time of either CO or final inspection, whichever event happened first, because this timeline aligns with the incidence of the impacts on public facilities. Some cities collected fee payments at different points in the development timeline for different fees. For example, Oakland collects half of its affordable housing impact fees at the time of building permit issuance and half at the issuance of CO. This split timeline was established because affordable housing fees make up the lion’s share of total fees (82 percent and 92 percent of total fees for single-family and multifamily prototypes, respectively), and splitting collection times was intended to free up funds for affordable housing while also limiting the amount of carrying costs on loans (Raetz, Garcia, and Decker 2019, 34).

Some jurisdictions provide fee deferral programs to build more flexibility into the timing of fee collection.⁶⁹ These deferral programs can represent an important local tool to accommodate developer concerns when fiscally possible. They were found to incentivize new developments because they enabled developers to pull larger batches of permits at once and allowed a steady supply of work for builders to move construction workers smoothly from project to project rather than reassembling teams, which can be costly and challenging in the tight labor market. However, there are also potential challenges with fee deferrals in that without the presence of collateral it may be difficult to recoup the full amount of the fee later in the process (Raetz, Garcia, and Decker 2019, 34).

Footnotes

⁵⁵ FHWA is not involved in conducting or reviewing these studies, even if the proposed DIF will support highway infrastructure.

⁵⁶ It is important to distinguish market-rate housing as part of new residential developments from affordable housing as part of public facility impacts. In addition to affordable housing impacts, residential developments create impacts on all public facilities, including roads, water/wastewater, police/fire, parks/open space, schools/libraries, etc.

⁵⁷ LOS standard examples given for roads in this primer refer to LOS A through F, as defined in Highway Capacity Manual (HCM 2016).

⁵⁸ In California, for example, relative to the legal maximum found in nexus studies, Oakland set a public building fee at 9 percent, Los Angeles set a parks fee at 33 percent, and both Imperial and Riverside counties each set their parks fees at 100 percent.

⁵⁹ For example, City of Sacramento ’s GP sets their parks LOS at 5 acres per 1,000 residents, but the new parks impact fees were set based on a lower standard of 3.25 per 1,000 residents.

⁶⁰ Property tax allocations from the State can vary widely from city to city. In California, for example, some cities receive as much as 49 percent, whereas others as little as 3 percent of property tax revenues from the State, which can greatly affect local infrastructure budgets. In addition, some jurisdictions may have Federal and/or State funding for certain infrastructure or other VC techniques such as SADs already in place to draw revenues.

⁶¹ Raetz, Garcia, and Decker (2019, 28) recommends a State-level support in the form of technical assistance or a standardized feasibility tool that localities could use to conduct their own independently designed feasibility studies.

⁶² For example, in San Mateo County, California, 16 jurisdictions hired one consulting firm to combine (but separate) nexus and feasibility studies pertaining to 21 elements in their GPs. This combined strategy resulted in each jurisdiction with 75 percent in cost savings when compared to the cost of hiring
consultants individually.

⁶³ Beyond geographic specificity, impact fees levied also reflect high variance in terms of funding priorities. In California, for example, localities with more greenfield developments, such as Irvine and Roseville, prioritize transportation funding in their fee structures. Conversely, Los Angeles and Oakland, both built-out, large cities, prioritize affordable housing fees.

⁶⁴ According to HUD (2008, 57), for example, the reduction in miles per person from the lowest residential density category (fewer than 75 units/mi2) to the highest (more than 6,000 units/mi2) is about half.

⁶⁵ Care must be taken, however, to ensure this is done properly. For example, although Texas municipal service districts (MSDs) may finance their own infrastructure, they typically do not finance the regional roads and regional parks serving them (HUD 2008, 55).

⁶⁶ To date, local agencies have adopted few road impact fees that vary by the size of the dwelling unit. This is largely because road impact fees are generally based on national trip generation rate data from the Institute of Transportation Engineers (ITE) trip generation manual, which does not provide rates by dwelling size. However, ITE data are often modified to reflect other sources that document trip generation rates for residential uses that vary by the size of the household.

⁶⁷ One way for developers to freeze fees early in the process is to use development agreements or vesting maps, but these typically only apply to very large projects or subdivisions.

⁶⁸ For example, an analysis of development pipeline data from the City and County of San Francisco in production between 2009 and 2017 found that the time between entitlement and certificate of occupancy averaged approximately 2 years.

⁶⁹ For example, since the late 1990s, Sacramento County has offered three impact fee deferral programs to encourage economic development, affordable housing, and residential developments (Raetz Garcia, and Decker 2019, 34). The programs allow developers/builders to pay a small portion of the development impact fees at building permit and to defer or delay paying the remainder of the fees until a later date.