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Development impact fees (DIFs) are intended for off-site public improvement needs for new developments that trigger economic growth. DIFs complement other value capture (VC) techniques, such as tax increment financing (TIF) and special assessment districts (SADs), which are derived more from existing developments with on-site improvement focus. Instead of imposing DIFs on a project-to-project basis, local governments are increasingly choosing to legislate formal DIF programs into local ordinances, tying them directly to local planning processes and helping to finance their overall capital improvement plans (CIPs) and to achieve their long-term growth objectives.
Establishing a DIF program involves the following:
This primer provides practical information for implementing a DIF program by:
Chapter 1: Goal of This Primer
The basic goal of this primer is to provide practical information on DIFs and how they can be used for infrastructure funding. The primer is geared to local and regional governments and other public agencies that are responsible for critical infrastructure provisions and facing major funding challenges.
Chapter 2: What Is DIF and How Is its Use Different from Other VC Techniques?
A DIF is a one-time, up-front cash payment that a developer makes, with the local government’s approval, for a new development project. This fee offsets some or all of the costs of public facilities outside the project’s boundaries that benefit the project, including parks, schools, roads, water/sewage, utilities, and police/fire/emergency services. The fee was originally intended for capital expenditures, but its use has been expanded to include operations, maintenance, and administrative expenses.
Compared to the informal system of negotiated exactions, DIFs add speed and predictability to the development process and are likely to generate considerably more revenues. DIFs can also fund a wider variety of services than special assessment districts (SADs), a prevalent VC technique based on a special levy imposed on property owners. Unlike SADs, DIFs can be structured so that new developments can buy into existing excess infrastructure capacity, thus allowing local governments to recoup prior public investments. DIFs are also best suited for incremental investments that leverage existing infrastructure, such as infills and redevelopments, for which local government can apply marginal cost pricing.
Chapter 3: How Well Does DIF Address Overall Efficiency and Equity Concerns?
In addition to overall policy perspectives, a DIF structure affects whether local agencies impose fees efficiently and equitably across key DIF stakeholders.
Evaluating the DIF efficiency concerns as an infrastructure financing mechanism entails three
basic considerations:
Regarding the sufficiency issue, for new developments, DIF revenues are often insufficient to cover the cost of the infrastructure needs. When DIFs are legislated into local ordinances, they are tied directly to a local general plan (GP) to guide future developments so that early planning efforts can help minimize insufficient funding issues in the future. Regarding the proportionality concern, DIFs have survived its challenges relatively well when compared to other VC techniques because they are legally prohibited from charging new developments more than their proportionate share in the cost of new public facility needs. DIFs, however, can raise the price of properties by more than the amount of the fee and favor existing developments at the expense of new developments. On issues related to the marginal pricing opportunity, the basic premise behind DIFs has been that new developments pay the marginal cost of public facility needs to accommodate the incremental growth they generate. Under marginal pricing, the issue of geographic equity becomes a factor in that greenfield areas may be more costly to serve than infill or redevelopment areas in close proximity to existing infrastructure.
Evaluating the social, or vertical, equity concerns is based on the ability-to-pay principlerooted in welfare economics in which public facilities are paid by only those who are able and can afford to pay. Under DIF, vertical inequities can occur in two respects: (1) a flat-fee structure that does not take into consideration the affordability factor and (2) increases in property prices resulting from DIFs that can price out low-income property buyers.
The problem with the regressive, flat-fee structure can be fixed with a more layered approach to designing the DIF structure, which can vary by land use and other factors. DIFs generally raise prices of both existing and new properties, and make them less affordable, especially for lower income households and renters. In a competitive market, developers also pass on the DIF costs to property buyers and renters, exacerbating the situation even further.
Chapter 4: What Are the DIF Legislative Needs and How Have They Evolved?
Currently, the legal underpinning of DIFs is primarily related to exactions in general and on landmark rulings from two U.S. Supreme Court cases—Nollan v. California Coastal Commission (1987)1 and Dolan v. City of Tigard (1994).2 Prior to the Nollan/Dolan cases, the legal basis for exactions was defended as an exercise of local police powerto protect the health, safety, and welfare of the community. Historically, the most contentious legal challenges for exactions under the police power has been the regulatory takings concerns, which occur when government imposes (1) a regulation (e.g., downzoning) that limits the owner's use of that property or (2) exactions on specific groups to pay for an improvement that benefits not only the group but the larger public.
The Nollan/Dolan rulings came about to directly address these regulatory takings concerns and for overarching guidance on their justification. These landmark cases established that to collect exactions (1) there needs to be a direct relationship between the project proposed and the exaction required (referred to as the essential nexus test per Nollan) and (2) the exaction must be roughly proportional to the impact created by the project (referred to as rough proportionality test per Dolan). To pass these nexus and proportionality tests, public agencies began commissioning what is now called a nexus (or fee) study to demonstrate a legal and quantitative basis for the tests.
The more recent ruling by the U.S. Supreme Court on Koontz v. St. John River Management District (2013),3 the third landmark case on exactions, further expanded the Nollan/Dolan ruling to explicitly include monetary exactions (i.e., impact fees as opposed to land dedications and/or in-kind facility or service provisions). The ruling also clarified that stricter Nollan/Dolan tests must be met at a project level, but a more flexible reasonable relationship test could be applied under legislated exactions that apply programmatically across multiple projects.
Following the Nollan decision in 1987, several States began adopting DIF enabling legislation, first by Texas in 1987, followed by Illinois in 1988, and soon thereafter by California and New Jersey in 1989.
DIF legislative experience has been highly diverse from State to State. Some have statewide enabling legislation that deal with broad local authorities to impose impact fees, whereas in others, authority is given to certain localities only. In most States, DIF policies have evolved through specific court-tested efforts by individual jurisdictions to generate funds they needed to provide public services.
There are currently numerous standards and guidelines available to assist local and regional agencies in developing a legally defensible DIF program. For some cities, such as San Francisco, the local DIF enabling ordinance preceded the State enabling act, whereas for others, the local enabling statutes for specific project cases operationalized the authority granted by the State statutes. After Nollan/Dolan, governments, rather than developers, have generally borne the burden of proof to show that a fee bears a reasonable relationship to the project impact. Once a locality enacts DIF legislatively, however, the burden shifts to the developer. The locality's burden is met through legislatively enacted findings, which comply with the State DIF statute. In general, local DIF ordinances provide greater details on the uses of DIFs, including whether the fees are exclusively for capital expenditures or for other operations, maintenance, and/or administrative expenses.
Chapter 5: How Can a DIF Program Be Best Structured to Maximize Revenues without Impeding New Developments?
To implement a DIF program, local agencies initiate nexus studies through consultants to substantiate that the types and amounts of DIFs charged on new developments meet the legally defensible nexus/proportionality standards. In these studies, consultants develop different fee schedules for different public facility categories (e.g., transportation, water/sewage, schools, parks/open space, fire/safety, affordable housing, etc.) to provide maximum legally defensible fee ceilings. Public agencies often choose to set their fees below these ceilings to ease concerns about the fees being too excessive to impede new developments. Public agencies’ funding priorities and their infrastructure needs can also drive the ultimate decision on fee levels.
The way DIFs are structured can improve the proportionality concerns presented earlier while also helping to incentivize those developments that are consistent with the overall local land use and planning goals. Designing the DIF structure basically entails the following:
Regarding the service area, the larger it is, the more flexibility there is in spending the DIF revenues. Service areas that are too small or too numerous can result in insufficient revenues. For example, even though it may be easiest to design and administer one service area for an entire jurisdiction, having multiple service areas can sometimes help minimize public facility costs and promote local land use planning goals. In addition, areas with alternative funding sources—such as those with existing revenue streams from other VC techniques (e.g., TIF or SAD) or from supplementary Federal/State funding sources—could be treated separately where a lower fee structure is allowed.
Regarding the LOS standards, establishing the service standards for new developments is one of the most critical elements to determining new public facility needs. In DIF statutes, aside from the State and Federal minimum requirements, local agencies generally have full authority to determine the desired LOS standards for different public facilities. Although it is usual practice to adopt the same LOS standard across an entire jurisdiction, 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.
Regarding the basis for fee determination, once geographic-specific service areas are defined, local agencies can develop a set of standard fee schedules for each area based on the LOS standards pertinent to that area. For each public facility category, standard fee schedules can be developed by land use and building type. For roads, for example, impact fees are generally based on the average vehicle trips generated:
Incremental public facility costs based on the LOS standards are then linked directly to incremental average vehicle trips to establish unit cost per trip. Final DIF levels—in terms of $/DU for residential and $/1,000 ft2 for nonresidential uses—are ultimately determined by applying this unit capital cost to specific average vehicle trip generation for each land use.
Finally, the timing of fee payments—specifically, points of fee assessment (imposition) versus fee collection—can become an important part of DIF structuring because of a significant lag (sometimes as long as several years) between when a local agency approves a development project and when actual development takes place. These two points can be simultaneous; for example, local agencies assess and collect fees at the beginning with the building permit or at the end with the final inspection or issuance of the certificate of occupancy (CO). Alternatively, they can occur at different times; for example, fees are assessed at the building permit stage but collected at the final inspection or CO issuance stage.
Chapter 6: What Are the Basic Steps Involved in Implementing a DIF Program?
The basic elements of DIF program implementation generally include the following:
DIFs are often multilayered, and each State may have other developer charges outside DIF regulations. One of the key DIF implementation challenges, thus, has been the difficulty of estimating the total fees (“fee stack”) associated with a development project due to the lack of fee transparency and standardization. From the public agencies’ perspective, this can prevent tracking and assessing the reasonableness of fees. From the developers’ perspective, it can present difficulty in accurately predicting the total project costs needed to assess project feasibility in the predevelopment stage. Often, many developers are not willing to risk starting a project without knowing the costs, which could lead them to decide to take their projects elsewhere.
Some ways to increase transparency are by posting:
Chapter 7: Developing and Adopting Transportation Impact Fees—A Case Example
The City of East Palo Alto, although located in the heart of Silicon Valley in California, has historically faced socioeconomic challenges typical of a less-resourced city; that is, low levels of education, high levels of poverty and unemployment, and an undersupply of affordable housing. Consistent with the overall regional growth strategy focused on in-fill developments, the city identified Ravenswood Redevelopment Project Area as the primary means for future growth for the city. In 2012, the city adopted the Ravenswood Specific Plan (RSP) as a framework for transforming the Ravenswood area into a new downtown. RSP identified significant investments in new or upgraded infrastructure to support the growth, many of which involved off-site improvements that would benefit the entire city as well as the RSP area. The city subsequently decided to use DIFs as the primary mechanism to fund this development-necessitated infrastructure.
At the time of RSP adoption, the city did not have a standard, legislated impact fee structure. The city negotiated DIFs on a case-by-case basis, making them more vulnerable to legal challenge and more staff-intensive to administer. City officials, thus, decided to develop and codify a uniform and legally defensible DIF program to better support the projected development. Between 2013 and 2018, the city commissioned a series of nexus studies to cover a variety of city services, including roads and streetscape, water and stormwater infrastructure, parks and trails, and community facilities. These studies culminated in the adoption of a citywide DIF program, which went into effect in July 2019.
As part of developing the overall DIF program, the city issued two separate transportation-specific nexus studies to be conducted. The 2013 study recommended RSP-specific fees, with no fees outside the RSP area. In 2018, the city commissioned another nexus study, which provided the basis for the citywide transportation impact fees that the city ultimately adopted in 2019. The 2018 study was based on the 10-year CIP from the city’s GP and RSP, which contained 23 transportation projects totaling $100 million of which $25 million was attributable to new growth based on incremental vehicle trips generated.
Most important, the basis for the 2018 transportation fee schedule were the traffic forecasts for East Palo Alto. In particular, the number of vehicle trips generated by different uses (i.e., single- and multifamily for residential and office, retail and industrial for nonresidential) supported the fee schedule. As a starting point, the 2018 nexus study used trip generation rates of the Institute of Transportation Engineers< (ITE), which were adjusted to account for the following:
The maximum legally defensible fees in the nexus study were based on the unit capital improvement cost per trip applied to vehicle trips generated by land use. The city council ultimately adopted these maximum fee levels, except for retail, which they reduced based on what were the prevailing impact fee levels in the neighboring communities.
Concluding Remarks
The use of DIFs by local governments has evolved substantially over recent decades. Although at times complex and challenging, the underlying DIF principles are better defined now than ever. For those public agencies new to DIFs, a substantial body of literature and case examples exist—some of which appear in this primer—that can help guide a DIF implementation process. Particularly when a formal DIF program is legislated by local ordinance, due to their focus on off-site improvements for new developments, DIFs can serve local governments as a viable option to provide a reliable local infrastructure funding source that will accommodate growth. Together with development agreements, DIFs represent one of the most powerful and robust VC techniques at public agencies’ disposal to help fund transportation infrastructure improvements.
1 Nollan v. California Coastal Commission, 483 U.S. 825 (1987), https://supreme.justia.com/cases/federal/us/483/825/.
2 Dolan v. City of Tigard, 512 U.S. 374 (1994), https://supreme.justia.com/cases/federal/us/512/374/.
3 Koontz v. St. Johns River Water Management Dist., 570 U.S. 595 (2013), https://supreme.justia.com/cases/federal/us/570/595/.
