impact fees: overview » introduction » defer payment

While many communities collect impact fees upon approval of a development site plan or issue of a building permit, setting payment due dates this early in the development process results in additional carrying costs for the developer or home builder (see Sidebar). These costs will likely be passed on to new residents in the form of higher home prices, without a corresponding increase in the level of services provided. To mitigate additional increases in home prices caused by early collection of impact fees, some communities allow deferral of payment until the issue of a Certificate of Occupancy or at the final inspection.  This may be one option for communities that are considering waiving impact fees in the face of an economic slowdown.  As of March 2010, San Francisco's Mayor Newsom had proposed allowing developers to defer payment of impact fees until after projects have been completed or sold, reducing upfront costs and, potentially, encouraging job creation.  Instead of losing potential revenue, deferral of payment may allow communities to assist struggling projects while not losing revenue for infrastructure needs.

Alternatively, Capacity Unit Assessment (CUA) programs may be used to reduce the cost barriers imposed by impact fees by allowing payments for the infrastructure associated with new development to be spread out over time.

Rather than charging home builders an up-front per-unit fee -- which is often passed on to buyers through an increase in home prices -- local governments finance the costs of the new infrastructure, typically through the sale of bonds. Buyers of the new homes then pay an annual tax surcharge, over a defined number of years, to service this debt. While there are generally additional administrative fees and interest charges associated with collecting payments over time, working families benefit from the ability to spread costs over the life of the CUA, which may be up to twenty or more years.

Solutions in Action
In Hillsborough County, Florida, home builders have the option to participate in the time-payment program, which splits the cost of water and sewer impact fees between builders and home buyers.

Builders who choose to participate are responsible for a per-unit impact fee payment of $2,170 for a single-family home ($1,300 per unit for multifamily housing), which is collected prior to the issuance of a certificate of occupancy. Home buyers are responsible for the remainder of the fee (approximately $3,300) and can choose to either pay the full amount in a lump sum at closing, or spread payments out over a 20-year period.

Households that choose to finance their fee payments typically pay an interest rate lower than a home mortgage rate, and can choose to pre-pay the balance owed without penalty at any time. Because income from the ongoing impact fee installment payments is bondable, the County has also been able to increase its financing capacity and build even more infrastructure.

See page 101 of the Impact Fee Handbook to read the National Association of Home Builders description of the time payment program.
How does early collection of impact fees affect home prices?

Carrying costs, also called holding costs, are the ongoing expenses associated with maintaining a product inventory -- in this case, homes -- over time. These "soft" costs include items such as insurance payments, property taxes, and the cost of financing.

Collecting impact fees very early in the development process can result in additional carrying costs that eventually get passed on to residents in the form of higher home prices.

Real estate developers, for example, are often asked by lenders to demonstrate that a new home will cost at least 4 to 5 times more than the lot on which it is built in order to receive approval for a construction loan.

If payment of a $2,000 impact fee is due early in the development process and covered by a commensurate increase in the amount of the construction loan, the indirect result could be an $8,000 to $10,000 increase in the cost of a new home in order to make the financing work.

Builders and developers also incur higher carrying costs when they take on additional debt to cover payment of impact fees long before a property is sold, as interest due on the loan adds up over a longer period of time.

Home buyers are affected by additional carrying costs -- not only through increased home prices, but also through additional increases in closing costs, which are typically assessed as a percentage of the total home price.

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Allow impact fees to be paid on a deferred basis
By allowing payment of impact fees to be deferred until the end stages of the development process or paid over a period of years following occupancy, communities can help to reduce housing and development costs without affecting the level of services provided.

Other pages in this section:

Adopt a proportionate impact fee schedule
In contrast to a flat, per-unit fee structure, proportionate impact fees reflect variations in unit size, location and other features that have been shown to influence demand for services.

Allow fee reductions or waivers
Full or partial impact fee waivers help preserve the affordability of new homes. Some communities find alternative funding sources to offset these losses and ensure that public services infrastructure keeps pace with new development.

Adjust fees based on existing infrastructure and service area
In some areas the existing infrastructure already has adequate capacity to accommodate new homes. Lowering or eliminating impact fees in such neighborhoods helps preserve affordability and may create an extra incentive for affordable infill development.

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