IMPACT FEES:
PROCESS, PROCEDURES AND
REQUIREMENTS
Dr. James P. Gaines
Research Economist
Real Estate Center at Texas A&M
University 1
The Public Finance Issue: The
Cost of Growth
Communities typically encourage, foster and desire
growth and development
New growth requires key public services
New growth creates additional demand for public
services that often exceeds current capacity
Existing residents typically want new residents to pay
for increased/additional service facilities
If expanded services and facilities aren’t available,
growth may not occur
2
Impact Fee Questions & Issues
What are Impact Fees?
Why are Impact Fees Charged?
How are Impact Fees imposed?
What can Impact Fees be imposed for?
How can Impact Fees be spent?
How are Impact Fees calculated?
How must Impact Fees be accounted for?
Who can charge Impact Fees?
What is the geographical coverage of Impact Fees?
3
Impact Fee Questions & Issues
What kinds of properties have to pay Impact Fees?
When are Impact Fees Assessed?
Who pays Impact Fees?
When are Impact Fees Paid?
Can the Impact Fee be increased after assessment?
What credits are available to offset Impact Fees?
Are Impact Fees refundable?
4
Texas Impact Fees
Impact Fees allowable under Chapter 395 of the
Local Government Code
Roadways
Water and waste water
Drainage, storm water and flood control
All other regulatory fees, assessments, exactions, or
costs are not included in this Chapter and should not
be called Impact Fees
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TEXAS IMPACT FEE PYRAMID
IMPACT FEE CIP − CREDIT FOR FUTURE
MAXIMUM NEW SERVICE UNITS
IMPACT FEE
PER SERVICE
UNIT
Credit for ad valorem taxes
CREDIT and service fees used to pay
For Tax And Fee for infrastructure and generated
Revenues Generated by new development: calculated
By New Development or 50 percent of Impact Fee CIP
IMPACT FEE ELIGIBLE CAPITAL Include only projects
IMPROVEMENT PLAN eligible for Impact Fee
Itemized, Estimated Costs Of New Facilities funding
Or Expansion Projects “Necessitated By And
Attributable To” Projected New Development
Key assumptions and
LAND USE ASSUMPTIONS & DATA
data for growth
Defined Service Area Projected Land Uses, maximum 10 years projections and
Existing Land Uses Projected Future Capacity Needs capital facility needs
Existing Service Units Service Units equivalency by land use category
Existing Usage by SU type Projected Number of Service Units
Existing Capacity Projected Service Unit usage by land use category
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INITIAL CAPITAL IMPROVEMENTS
PLAN (CIP)
Most cities develop Master Plans and Capital Improvement Plans
prior to establishing an Impact Fee.
LAND USE COSTS TO “UPGRADE, UPDATE,
DENSITY, IMPROVE, EXPAND, OR REPLACE
DEMOGRAPHIC, IMPROVEMENTS TO MEET EXISTING
NEEDS AND USAGE AND
ECONOMIC STRICTER SAFETY, EFFICIENCY,
DATA, LAND USE – ENVIRONMENTAL, OR REGULATORY
METHODOLOGY SERVICES – STANDARDS” OVERALL
AND TRANSPORTATION-
ASSUMPTIONS MASTER CIP
USED TO PLAN(S) REQUIRED NEW OR
MAKE EXPANDED FACILITIES
FUTURE “NECESSITATED BY AND PORTION ELIGIBLE
ATTRIBUTABLE TO FOR
GROWTH
NEW DEVELOPMENT”
PROJECTIONS IMPACT FEE
ASSESSMENT
Result of projections, master plans and overall CIP is to
determine the need for an Impact Fee, the type of Impact Fee
(road, water/sewer, drainage/flood control) and the areas where
new growth and development will take place. 7
PROCESS TO CREATE A LOCAL
IMPACT FEE ORDINANCE
Step 1: Establish a Local
Capital Improvement Plan CIP must be developed by qualified
(CIP) professionals using generally
accepted engineering and planning
§395.0411 practices, which will include
establishing service area
Step 2: Set date for public hearing boundaries and land use
to consider the LUA and CIP for assumptions (LUA)
the designated Service Area (SA)
§395.042
Step 3: Land Use, CIP and time
assumptions must be made
publicly available prior to
publication of the date of the first
public hearing
§395.043
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PROCESS TO CREATE A LOCAL
IMPACT FEE ORDINANCE
Step 4: Publish and send notice of public Must send notice of hearing by
hearing on land use assumptions and CIP certified mail to anyone who has
at least 30 days prior to hearing requested (in writing) notice be
provided within the previous 2
§395.044 years
On or before date of hearing, appoint
Conduct public hearing 5-person Advisory Committee
§395.058
Step 5: Adopt or reject Land Use
Assumptions and CIP. No Emergency Political subdivision must approve
adoption permissible or disapprove the land use
assumptions and CIP within 30
§395.045 days after date of public hearing
Step 6: May Adopt Land Use Assumptions
for System wide water supply, treatment
May not adopt System wide
and distribution facilities or wastewater
assumptions for storm water,
collection and treatment facilities that
drainage, flood control or
covers the entire political subdivision
roadway facilities
§395.0455
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PROCESS TO CREATE A LOCAL
IMPACT FEE ORDINANCE
Step 7: Set a date for public hearing
for adopting Impact Fee (IF)
Ordinance
§395.047
Step 8: Publish and send notice of Must send notice of hearing by
public hearing on IF at least 30 days certified mail to anyone who has
prior to hearing requested (in writing by certified mail)
notice be provided within the previous
§395.049 2 years
Step 9: Advisory Committee must file
An Impact Fee cannot be held invalid
written comments on proposed
because the public notice requirements
Impact Fee at least 5 business days
were not complied with if compliance
prior to public hearing
was substantial and in good faith
§395.050
§395.078
Conduct public hearing
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PROCESS TO CREATE A LOCAL
IMPACT FEE ORDINANCE
Step 10: Adopt or reject Impact Fee. Political subdivision must
No Emergency adoption permissible approve or disapprove the Impact
Fee plan within 30 days after date
§395.051 of public hearing
Appeal of Impact Fee Ordinance
must commence within 90 days
§395.077
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PROCESS TO UPDATE A LOCAL
IMPACT FEE ORDINANCE
Step 1: Every 5 years the political The political subdivision may
subdivision decides to update the determine no update is necessary and
LUA and CIP or not. The initial 5- provide public notice and notice by
year period begins on the day the certified mail to those who requested
CIP is adopted. it, that no update is necessary.
§395.052 §395.0575
Step 2: Within 60 days of receiving
the updated plans, set a date for a
public hearing to consider updated
land use assumptions and CIP for the
designated Service Area (SA) If, within 60 days of publishing notice
not to amend the land use
§395.053 assumptions, CIP or IF, anyone
makes written request to update the
plan, the political subdivision will do
so following steps 1-6
Step 3: Land Use, CIP and time
assumptions must be made §395.0575(d)
publicly available prior to
publication of the date of the first
public hearing
§395.054
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PROCESS TO UPDATE A LOCAL
IMPACT FEE ORDINANCE
Step 4: Publish and send notice of
public hearing on land use Must send notice of hearing by
assumptions and CIP at least 30 certified mail to anyone who has
days prior to hearing requested (in writing) notice be
provided within the previous 2 years
§395.055
Step 5: Advisory Committee must
file written comments on proposed On or before date of hearing,
amendments to plans and IF at least appoint 5-person Advisory
5 business days prior to public Committee
hearing
§395.058
§395.056
Conduct public hearing
Step 6: Approve or disapprove the Political subdivision must approve or
amendments to the Land Use disapprove the amended land use
Assumptions and CIP. No assumptions and CIP within 30 days
Emergency adoption permissible after date of public hearing
§395.057
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BASIC FUNDING FORMULA FOR
IMPACT FEE COMPUTATIONS
Seven-step process to compute the Maximum Impact Fee per
Service Unit
1 2 3 4 5 6 7
Credit for
New Pro- Max.
Ad
Define Develop- portion
Service
Evaluate
ment, Of CIP
Valorem Impact
Net CIP
Current Taxes Fee
Area Service Within the For
Facilities, And =
And Units and Service Impact
Capacity Utility Net CIP
Type Service Area Fee
and Service /
Of Unit Attrib- Assess-
Demand Revenues Projected
Impact Demand utable ment
From New
Fee By To new
New Service
Land use Develop-
Develop- Units
Category ment
ment
All of the information, analysis and data are part of the Impact Fee Study
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BASIC FUNDING FORMULA FOR
IMPACT FEE COMPUTATIONS
1. Define the Service Area(s) by type of Impact Fee assessment: roadway
improvement, water/sewer, drainage.
ROAD
Service Area limited to 6 miles within
IMPACT
corporate limits (not extendable to ETJ)
FEE
WATER/ Service Area can be defined as a portion
WASTEWATER of or the entire system and can
IMPACT FEE include ETJ if service is provided to ETJ
Service Area can be defined as a portion
STORM WATER
of or the entire system, and can
DRAINAGE
include ETJ if service is provided to ETJ,
IMPACT FEE
but cannot cross watershed boundaries
15
BASIC FUNDING FORMULA FOR
IMPACT FEE COMPUTATIONS
2. Evaluate existing service conditions/capacity within the defined
Service Area: total capacity, current demand/usage, excess capacity,
and deficiencies in capacity.
EXISTING EXISTING EXCESS
FACILITIES/ DEMAND/ SUPPLY OR
CAPACITY USAGE DEFICIENCY
If a deficiency in existing capacity is identified, the cost to cure the deficiency
is deducted from the CIP for Impact Fee computation;
If an excess of capacity exists, there is no provision.
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BASIC FUNDING FORMULA FOR
IMPACT FEE COMPUTATIONS
3. Estimate total new Service Units “necessitated by or attributable to”
new development within the Service Area and use, consumption,
discharge per Service Unit
RATIO OF SERVICE UNITS
BY LAND USE CATEGORY TOTAL
WITHIN THE SERVICE AREA NEW
FOR RESIDENTIAL, SERVICE
PROJECTED COMMERCIAL AND UNITS
DEVELOPMENT INDUSTRIAL USES
SERVICE BY LAND USE
AREA CATEGORY WITHIN
LUAs THE SERVICE AREA
FOR AT THE SPECIFIC LEVEL OR
LEAST 10 YEARS QUANTITY OF USE,
CONSUMPTION, GENERATION, DEMAND
OR DISCHARGE OF A SERVICE PER
UNIT FOR EACH NEW
CATEGORY OF CAPITAL SERVICE
The two data elements are IMPROVEMENTS OR FACILITY UNIT
specifically required in EXPANSION
395.014(a)(4)
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BASIC FUNDING FORMULA FOR
IMPACT FEE COMPUTATIONS
5. Calculation of the “Impact Fee CIP”
COSTS TO “UPGRADE, UPDATE, IMPROVE,
EXPAND, OR REPLACE IMPROVEMENTS PORTION OF CIP NOT
TO MEET EXISTING NEEDS AND USAGE
AND STRICTER SAFETY, EFFICIENCY,
ELIGIBLE FOR IMPACT
ENVIRONMENTAL, OR REGULATORY FEE FUNDING
STANDARDS”
OVERALL
CIP
REQUIRED NEW OR PORTION ELIGIBLE FOR
EXPANDED FACILITIES IMPACT FEE
“NECESSITATED BY AND FUNDING:
ATTRIBUTABLE TO THE IMPACT FEE CIP
NEW DEVELOPMENT” FOR A
PERIOD NOT TO EXCEED 10 YEARS
Most jurisdictions try to make as much of the CIP eligible for Impact Fee
Funding as possible
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BASIC FUNDING FORMULA FOR
IMPACT FEE COMPUTATIONS
6. Credit for taxes and service revenues generated by new development
within the defined Service Area.
A CREDIT TO THE IMPACT FEE CIP
IMPACT FEE CIP THE PORTION OF AD VALOREM TAX AND
from Step 5 UTILITY SERVICE REVENUES GENERATED
BY NEW DEVELOPMENT USED TO
PROPORTION PAY FOR IMPROVEMENTS, NET CIP FOR
OF CIP INCLUDING DEBT, INCLUDED IN THE
ATTRIBUTED
IMPACT FEE
CIP
TO NEW ASSESSMENT
DEVELOPMENT OR
WITHIN THE
SERVICE AREA 50 PERCENT OF THE
TOTAL PROJECTED COST OF
IMPLEMENTING THE CIP
The Credit to the IF CIP is critical in terms of the final fee assessment. Most
jurisdictions use the alternative 50 percent credit rather than trying to compute
future taxes and fee revenues.
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BASIC FUNDING FORMULA FOR
IMPACT FEE COMPUTATIONS
7. Enact ordinance setting the Impact Fee assessment per Service
Unit
MAXIMUM ALLOWABLE
IMPACT FEE PER SERVICE UNIT =
NET CIP FOR IMPACT FEE
ASSESSMENT
TOTAL NEW SERVICE UNITS
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IMPACT FEE
STUDIES:
ANALYSIS AND
ASSESSMENT
“The Devil is in the Details”
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IMPACT FEE STUDY
CHECKLIST
By Law, the Maximum Assessable Impact Fee =
Eligible CIP Costs – Credit For Future Taxes And Revenues
Projected Total New Service Units
Impact Fee Study provides the requisite data, analyses, computations and
explanations to derive the values used to compute the maximum allowable
impact fee per service unit
Parts of the study are specifically required by Chapter 395
Parts of the study are based on industry standards and assumptions by the
engineering firm and/or the jurisdiction
Key to analyzing Impact Fee studies is to examine the
assumptions and data sources
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IMPACT FEE STUDY
CHECKLIST
Defined Service Areas
Water and waste water impact fees Service Area may include
portion of or entire system, including ETJ if service is
provided to ETJ area
Roadway impact fees Service Area is limited to six miles
inside the corporate boundaries and may not include any
ETJ territory;
o Law does not define six miles, i.e., whether it means six miles square,
six mile radius, six square miles or six linear miles
Storm water, drainage or flood control can include entire
system, including ETJ if the ETJ is served by the system, but
cannot cross watershed boundaries
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IMPACT FEE STUDY
CHECKLIST
Land Use Assumptions And Growth Projections
May be taken from other agencies or organizations, e.g. local
COG.
Residential and non-residential growth projections based on
??? (mostly population projections)
Non-residential uses divided into commercial and industrial
general categories become very specific, especially re: service
units created and use rates
Take into account undevelopable land areas, land dedicated
to public uses (roads, parks, schools, etc.), waterways, flood
plains, rivers and streams, not in the corporate limits or ETJ
Projected growth timing: uniform, peak years, down years,
etc.?
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IMPACT FEE STUDY
CHECKLIST
Evaluation Of Existing Facilities, Services, Capacity And
Demand
Generally used to identify existing service capacity deficiencies
Cost to cure a deficiency in existing services is not an eligible
cost for Impact Fee funding
No provision for allowance if projected new demand < existing
excess capacity; Q: how is any of the CIP attributable to new
growth?
If existing capacity can absorb projected increased demand
attributable to new growth, can an Impact Fee be imposed?
If improvements go to “bettering” the service level for existing
use, cost is not eligible for Impact Fee funding
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IMPACT FEE STUDY
CHECKLIST
Costs Eligible For Impact Fee Funding
construction contract price;
surveying and engineering fees;
land acquisition costs, including land purchases, court
awards and costs, attorney's fees, and expert witness
fees;
fees paid or contracted to consultant(s) preparing or
updating the capital improvements plan;
interest and other finance costs only if the impact fees
are used for the payment of principal and interest to
finance the projects listed in the CIP
pledge of an impact fee as security for the payment of
debt service if the improvement or expansion is
identified in a capital improvements plan
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IMPACT FEE STUDY
CHECKLIST
Costs Not Eligible For Impact Fee Assessment
construction, acquisition, or expansion of public facilities or
assets not identified in the CIP;
repair, operation, or maintenance of existing or new capital
improvements or facility expansions;
upgrading, updating, expanding, or replacing existing capital
improvements to serve existing development in order to
meet stricter safety, efficiency, environmental, or regulatory
standards;
upgrading, updating, expanding, or replacing existing capital
improvements to provide better service to existing
development;
administrative and operating costs of the political
subdivision
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IMPACT FEE STUDY
CHECKLIST
Proportion of CIP “Necessitated By And Attributable
To New Service Units”
Separation of individual project costs within the CIP
between upgrades, updates, service enhancement,
regulatory requirements or safety improvements to serve
existing demand vs. new/expanded facilities due to
growth and development?
Sometimes requires a project-by-project analysis of the
projects listed in the CIP
Some studies may include percentage allocations, but
with little or no explanation or support
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IMPACT FEE STUDY
CHECKLIST
Total New Service Units
Based on projected total development by land use
categories
o Law specifically requires a table of service units created
per land use category
Ratio of Service Units by land use Category is
required in the study
o Road Fees: residential usually number of units and
Commercial usually per 1,000 square feet of space
o Water/Waste Water Fees: based on meter size installed
(residential typically 3/4”, commercial and industrial
meter sizes vary upwards to 10” or more)
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IMPACT FEE STUDY
CHECKLIST
New Service Units Demand - Usage
A Service Unit Equivalency Table is required to depict the quantity of usage or
demand per service unit per land use category
o Road Fee Study usually called “Land Use/Vehicle-Mile Equivalency Table”
o Water and waste water Study: “Service Unit Equivalency Table” based on meter size
Use/demand is based on historical data or industry standard usage parameters
o Roadway demand rates uses vehicle-miles as the service unit: vehicle-miles = number of
trips x length of trip per land use category during peak hour (?) use, adjusted for pass-by
trips
o Water and waste water typically use MGD of water per day
What to Look For
Trip generation typically comes from Institute of Transportation Engineers Trip
Generation Manual and length of trip comes from other studies
Does estimated consumption/demand give credit for changes in technology?
If numbers are taken from range of possible values, should justify number selected
and site source.
Applicability of support data from other studies re: geography, age of structures,
sample size, density,
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IMPACT FEE STUDY
CHECKLIST
Credit for Ad Valorem and Service Fees Created by New Development
a credit for the portion of ad valorem tax and utility service revenues (for water/sewer fees)
generated by new service units during the program period that is used for the payment of
improvements, including the payment of debt, included in the capital improvements plan
OR
a credit equal to 50 percent of the total projected cost of implementing the capital
improvements plan
Obviously in the jurisdiction’s interest to have as much of the costs paid for by
Impact Fees as possible
Because of difficulty projecting property taxes and service fees, most jurisdictions
use the 50 percent credit
The ability of future taxes and user fees to provide sufficient revenues to pay for
capital improvements could be arguable point, but costly to prove
Rebut argument that future taxes/revenues not used to pay for capital costs
Is it challengeable to argue that credit should be higher if city uses 50%? If based
on projection of future taxes/revenues want to argue credit should be 75%, for
example
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Other Questions & Issues
1. One-size fits all Impact Fees despite variance in new
demand created?
2. Indexed residential fees by size, value, location?
3. Exemptions?
4. Compute phased/indexed fee amount based on
growth projections and timing?
5. Credit for existing excess capacity?
6. Is the state required 50% credit a floor or ceiling?
7. Refunds to future property owners?
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Questions?
33
IMPACT FEES:
PROCESS, PROCEDURES AND
REQUIREMENTS
Dr. James P. Gaines
Research Economist
Real Estate Center at Texas A&M
University 34