Real Estate Articles

Impact Fees in Development

Written by Brent Pace for Gaebler Ventures

When you are budgeting for your next development, don't forget to include the impact fees.

If you are developing your first real estate project, you are probably pretty excited to get started.

Impact Fees In Development

You've got great plans drawn up, and have good pricing from your architects, engineers, and contractors in order to get it built. But don't forget that most new development also have substantial impact fees due to the local municipality.

Impact fees were started by local governments (cities, townships, unincorporated portions of a county, etc) to help pay for growth. Imagine a city with a small downtown, some housing areas, and lots of vacant farmland out around the fringes. Suppose a developer comes in and decides to build a shopping mall on some of the farmland. In order to service that development, the city will need to make sure it has the roads, sewer, storm drain, electrical, and phone connections out to the development.

In the case where farmland is being developed, it is especially likely that services are not already located at the property. Even if services exist, a sewer line that services a farm house is likely inadequate compared to the sewer output for a large shopping center. In order to pay for some of these capital improvements, as well as to compensate the city for the impact the development will have on the community, the developer is often asked to pay impact fees. The following is a description of a few specific impact fees that you can plan for. Be sure to check with your local municipality for details on the impact fees they require before you begin construction.

Pure Impact Fees

Many fees are simply for the impact your development has. A municipality may charge you a fee based on the amount of sewer output, water consumption, etc. The basic function of a pure impact fee is to fund construction or expansion of off-site capital improvements that the municipality will need due to the impact of your development. For instance, if a new water purification plant is needed to serve new developments, your impact fee will go to help pay for that plant.

Linkage FeesLinkage Fees are like a housing impact fee. These fees are not found in all municipalities. The basic idea is to take money from developments to help provide affordable housing.

Mitigation Fees

A mitigation fee is created to help mitigate the impact of a new development. This could be for something as simple as the wear and tear a new development will cause on city and county roads. A common impact could be if a development is built on or near wetlands, and they must help fund mitigation to offset the impact.

Be sure to check for all impact, linkage, and mitigation fees before you move too far with your development. Many of them are defined formulaically, so that you will be able to predict what your fees will be before you start your project. For instance, an impact fee for a retail center might be based on the expected traffic to the center on a typical day. Impact fees for an office park might be based on the number of expected occupants in the new park. Either way, plan carefully to make sure you aren't caught off guard with impact fees.

Brent Pace is currently an MBA candidate at University of California at Berkeley. Originally from Salt Lake City, Brent's experience is in commercial real estate development and management. Brent will have tips for small business owners as they negotiate their real estate needs.

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