Local governments levy development impact fees on new housing development to help fund the expansion of public facilities and infrastructure. These revenues support the construction of critical facilities, such as parks, public safety facilities, other civic and community facilities, and transportation infrastructure, which many jurisdictions are struggling to fund given state policies that restrict local taxes, such as Proposition 13. However high fees can have a chilling effect on new housing supply. Earlier this year, the State of California released a report and template created by the Terner Center to aid cities and counties in appropriately calibrating their impact fees.
The report—developed in coordination with Seifel Consulting and relying on a set of expert interviews with cities, counties, and nexus study consultants—provides local jurisdictions with eight key steps to take as part of the process of adopting or updating a development impact fee that is applicable to residential development. The report also includes a framework for evaluating how fee levels will impact the economic feasibility of housing to be built.
Jurisdictions are currently required to demonstrate a connection between the impact of new housing on the cost of public facility investment and the amount of the fee. This relationship, or “nexus”, is determined by undergoing a nexus study, which is intended to quantify the impact of new development on public facilities. These studies also provide the supporting documentation and justification that is used to establish the legal authority for jurisdictions to charge these fees, so they are a critical component to the impact fee setting process.
However, there is no similar requirement to assess the impact of overall fee load on new housing supply. To some extent and depending on market conditions, higher development costs—including fees— force developers to pay less for land with no change in total costs. However, as the amount of impact fees charged to new development has increased over the years, so does the potential for fees to raise total development costs to a point that they inhibit residential development and the supply of housing. As noted in previous Terner Center research, residential impact fees vary widely across jurisdictions, and if set too high, can negatively impact new housing development by raising costs and limiting financial feasibility.
Our new report and resources provide guidance for assessing the overall impact of fee levels and the layering of fees on potential development. Read more here.