AMA - Development Charges
David in central valley California asks
I'm looking to develop a build to rent community of apartment sized single family homes. This will go from un- entitled vacant land all the way through to the sale of the built homes. My question is at what point are the impact fees paid. Is it while performing the horizontal land improvements and utility hookups? Or is it during vertical construction?
David, This is a great question.
For the listeners at home, let’s take a minute to describe impact fees or what in some places are called development charges.
These are fees that are charged to developers for the benefit of having the opportunity to make a profit from the expansion of a community. These fees are only assessed on new units that are added to a community. For example, if you demolish a house and replace the house with a new single family home, you would not pay any impact fee because you are not adding any density to the community. If instead you replace the single family home with a duplex, then you would pay an impact fee on the one additional unit and no fee for the existing unit you are replacing.
Impact fees pay for the municipal infrastructure that makes it possible for you to build your property. We’re talking about the roads, water infrastructure, sewers, schools, parks, public transit, community centres, expansion of policing and so on.
These fees vary widely from one community to the next, and they can vary widely within a community.
Some cities have zero impact fees. Impact fees are extremely common throughout California where you live.
I read a recent paper on the state of impact fees in the Central Valley in California where you live. I put a link to the study in the show notes. This 84 page report was authored in 2019 and gives a pretty good overview of the issues surrounding development impact fees in the Central Valley. It specifically studied 10 municipalities in the Central Valley.
Only a little over a quarter of the communities actually published the studies that were used to assess the impact fees. This lack of transparency makes it difficult to determine whether the assessment of impact fees is fair.
The schedule of fees was also not readily available in many of the communities. When you finally do get hold of the schedule, determining which payment applies to you can be incredibly confusing. Often the preliminary feedback and estimate from the planning department doesn’t match the final assessment of fees.
The net result is that many developers have a hard time predicting the correct fee structure for their financial pro forma.
In the absence of an accurate number, the only prudent thing to do is to estimate high and hope that the real impact fee comes in below your estimate. But there is also a chance that the project becomes unattractive with a high estimate for the impact fees. You might end up talking yourself out of a project simply because the municipal government is doing a poor job of being transparent about their development charges.
This is an excellent question and unfortunately it’s an area that is full of complexity and potential land mines. There is no quick or easy answer to your question. Hopefully this discussion helps you navigate through the maze and ask relevant questions from the decision makers who can answer the specific questions pertaining to a particular property and proposed development.