Over the years, the professionals at Development Planning & Financing Group, Inc. (DPFG) have reviewed and critiqued more than 200 impact fees studies on behalf of home builders and home builders associations around the country. These impact fee reviews reveal recurring errors and inaccuracies that often lead to overstated impact fees. Here are seven of the most common problems.
Surprisingly, careful reviews of fee studies often turn up numerous math errors that affect the final impact fee amount. One memorable example: During the course of a review of a roadway impact fee, our firm discovered that a single error in the consultant’s spreadsheet model had doubled the cost of a $25 million improvement to $50 million. By pointing out this error, the roadway impact fee was reduced by half! As a result of this and many other similar experiences, we recommend that builders and developers thoroughly review all fee studies for mathematical accuracy.
Inconsistent Levels of Service
Fee study audits sometimes uncover inflated service standards that lead to unfair impact fees. In a recent fee study critique, we discovered a city’s library impact fee was overstated by approximately 71 percent. As such, when reviewing fee studies it is critical to compare the levels of service the jurisdiction claims to actual current service levels.
Fixing Existing Deficiencies
Often, fee studies include one or more public infrastructure projects meant to remediate an existing infrastructure deficiency. Impact fees, however, are supposed to be used only to finance public infrastructure required to service new development, not to repair or improve public facilities related to existing residents. In one city’s proposed impact fee program, the city sought to use impact fees to install $108 million in sidewalks in areas of the community that had been developed in the 1970’s. A search of the town’s website showed that the federal government was forcing it to construct sidewalks to comply with the Americans with Disabilities Act. This was a clear violation of case law and industry standards. After revealing this problem, the sidewalk costs were removed from the fee study and the impact fees reduced accordingly.
Impact Fee Funding Offsets
Increasingly, jurisdictions charge impact fees to allow “growth to pay for growth.” At the same time, however, many of their proposed fee studies completely ignore the additional funding sources that come from new development. These sources include repayment of municipal bonds through property taxes, user fees, construction sales taxes, and other taxes whose revenues are dedicated to financing public infrastructure. These taxes are established mechanisms that allow new residents to pay for required services—and they must be taken into account in the form of a credit or reduction in impact fees. However, in many instances, jurisdictions don’t conduct this analysis—and neglect to reduce their fees.
Compliance with State Statute
Another problem is that fee studies often fail to fully conform to the guidelines designated in the state impact fee enabling statutes. Regular reviews of state statutory requirements are important to ensure they are being met. We once performed a fee study review for a Rocky Mountain area community and found that, of 23 items required by state statute regarding enacting impact fees, the community failed to fully comply with six of the requirements.
Fee studies will at times estimate construction costs for improvements that are higher than the costs planned for those improvements within the municipal budget or capital improvement plan. In one jurisdiction, school impact fees were approximately 24 percent higher, because inflated construction costs were used to determine the fees rather than the lower costs shown in the jurisdiction’s capital improvement plan. As such, it is important to review all construction costs utilized within the fee study and compare those costs to third-party estimates or recently completed projects.
Impact fees are meant to be collected to fund improvements that benefit a specific area. So a fee study should break down the jurisdiction into various service areas and estimate the amount of public facilities required to provide services to that particular area. Because different areas of a community will require different levels of service, it is typical to see the impact fees vary from service area to service area. A common mistake is that the jurisdiction’s fee study only includes one large service area. As a result, a homeowner in the southern portion of a town may pay a fee for a facility constructed in the northern portion of the community, from which they derive no benefit. Jurisdictions often employ this tactic so impact fee revenues may be “moved around” in a community, rather than funding improvements in the area for which the builder is paying the impact fee.
Original article, written by Carter Froelich, was featured in the Summer 2016 Issue of Best in American Living.