Impact fees: desperately seeking equity: all too often, impact fees assessed on apartments are disproportionate to the impact on their communities. Industry leaders must become involved in the decision-making processes to ensure that impact fees are assessed fairly.

Impact fees have become a form of "gap" financing for many local governments during the past generation. Once considered an "innovative" solution to financing facilities needed to serve new development, they have become part of the mainstream. When it comes to assessing impact fees on apartments, however, much needs to be done to assure they are charged equitably.

Beginning with the presidency of Ronald Reagan and continuing through each administration thereafter, including the present, the federal government has reduced its financial support for a wide range of local public facilities. For their part, states have been reluctant to fill the gap and have left local governments to their own devices to meet growing infrastructure needs. Declining federal and state funding, however, have not deterred municipalities from increasing standards, especially in the areas of environmental protection, transportation and education--even without the revenues to meet those new mandates.

Local elected officials have been reluctant to advocate higher taxes to help finance new or expanded facilities needed to accommodate the demands associated with new development. In most states, property and sales tax limitations make raising local taxes difficult. Caught between declining federal and state revenue and increasing standards and tax limitations, local governments have had to consider a wide range of alternatives, such as deferring infrastructure maintenance, degrading the level of service delivered to the public--such as higher student-teacher ratios, more congested roads and restricted library and recreation facility hours--imposing user fees, raising fees that already exist and turning to other "innovative" revenue sources.

One innovative source of revenue is impact fees, which have been enabled in 25 states and used in many others without explicit state enabling legislation, with Florida being the leading example. Impact fees are one-time assessments on new development to help finance facilities needed to accommodate its facility demands. At its heart, impact fees are based on a proportionate-share calculation that assigns facility impact with respect to units of demand. For residential development, "units" of demand are commonly units of demand per person, such as library books per capita, fire station square feet per capita or square feet of school space per student.

The Inequity

Too often, however, impact fees assessed on apartments are not equitable--that is, they are disproportionate to impact. Consider the following examples.

One county in Florida charges all dwelling units $5,443 for school facilities. The assumption is that all units impact on these facilities equally. This is not accurate. Census data show that single-family detached homes average 0.88 school children per unit but apartments average only 0.12. The proportionate-share impact of single-family homes on schools is $6,357 per unit and for apartments it is $2,057 per unit, yet both pay the same amount. By charging $5,443 on all residential units, single-family detached homes pay less than their proportionate share while apartments pay more--roughly 2.5 times more.

A less striking but more commonplace example comes out of Georgia where one county charges $1,266 per residential unit for parks, library, fire and police facilities based on a countywide average of 2.71 persons per unit. However, census data show that single-family detached units average 2.78 and apartments 1.92 persons per unit. Impact fees based on proportionality of impact would have detached homes paying $1,297 and apartments $894 per unit, respectively. Instead, apartments are paying 42 percent more than their proportionate share impact.

At the very least, impact fees on residential development need to recognize differences in occupancy levels between the major residential types, such as single-family detached, townhouse and apartment.

Impact and Proportionality

Impact fees are fees, not taxes. If they were taxes, they could be assessed without any real promise of a benefit in return. As fees, however, they must meet two prongs of what courts have called the "dual rational nexus" test.

The first prong is that analysis must show that new development has impacts on facilities that need to be offset through assessments proportionate to the impact. For example, a 1 million-square-foot shopping center creates more traffic than a 40,000-square-foot one and should thus offset traffic impacts proportionately.

The second is that the fees generate benefits proportionately. In the shopping center example, the revenues paid by the 1 million-square-foot shopping center should result in proportionately higher investments in mad capacity benefiting it than revenues paid by the 40,000-square-foot center.

Impact fees are routinely assessed so larger buildings pay more than smaller ones because of differences in traffic generation, employment density, customer or visitor frequency and so forth. In contrast, all too often they do not vary based on size of residential unit, such as between mansions and studio apartments. Homes of six or more bedrooms, for example, average more than twice the number of occupants than studio apartments, and, depending on the area, they can average three to more than 10 times the number of public school children.

In addition to recognizing differences based on type of units, impact fees on residential development should also recognize differences in size based, at least, on the number of bedrooms if not the area in square feet. Impact fees for Albuquerque, N.M., and DeKalb County, Ga., for example, are based on the size of a unit in square feet for public safety and park facilities (and libraries in the case of DeKalb County), and type and size of unit for transportation. Those fees were prep are d by a team composed of Virginia Tech professors (led by the writer), James C. Nicholas of the University of Florida and Tindale Oliver Associates in Tampa.

Refining Proportionality, Calculating Fees

The type and size of residential unit are important predictors of impact and thus ought to be used in calculating impact fees. There are other factors that can result in different levels of impact that all too often are ignored when it comes to calculating apartment impact fees.

For example, although most (but not all) impact fees for roads recognize that apartments generate fewer trips per unit, almost none account for further reductions associated with access to transit of land-use configurations. For example, the National Household Transportation Survey of 2001 indicates that automobile use declines up to 30 percent per person when bus service is available, yet it may be the case that no impact fee programs recognize this. Indeed, research conducted for the National Apartment Association (NAA) revealed that only one community recognized this: Atlanta reduces transportation impact fees by half if development is located within 1,000 feet of a rail transit station. That fee was developed by James Duncan Associates from Austin and this writer, then at Georgia Tech

Water and wastewater demand among apartments is also less than in most other types of residential development. Unfortunately, water and wastewater impact fees for apartments are usually based on meter connection sizes for commercial development and may not reflect residential demand. For example, the American Water Works Association (AWWA) publishes information showing capacity differences between a standard 3/4-inch line and larger lines; a 4-inch connection has 16.7 times the capacity of a 3/4-inch connection, for instance. Impact fees are often calculated based on those ratios.

The problem is that a large home on a large lot connected to a 3/4-inch connection may consume an average of 400 gallons per day (or more if irrigation is involved) while a 16-unit apartment building connected to a 4-inch line may consume 2,000 gallons, or 125 gallons per day per unit. The impact fee for apartments in this case should be a quarter of that for the large home but instead, based on AWWA rations, would be the same. Scottsdale, Ariz., recognizes this problem and charges water and waste-water fees ranging from a high of $5,495 for a large-lot home to a low of $1,337 per unit for attached units--about a quarter of the large lot case. These fees were calculated by Tischler Bise Associates in Bethesda, Md.

Apartment Industry Leadership Needed

An old saying in politics is that if you are not at the table you are on the menu. In my four decades of experience, I have rarely seen apartment interests engaged in the impact fee discussion, whether during legislative sessions addressing enabling legislation or local impact fee policy-making processes. Occasionally, local chapters of the National Association of Home Builders have represented apartment interests fairly, but this has not been the case everywhere. The apartment industry must advance its interests. There are several ways in which this can be done.

Before the ideas are presented, it is important to recognize that, like it or not, impact fees are here to stay. They will also get larger and cover more facilities. The reason is simple: Federal and state governments are no longer players in meeting local infrastructure needs and instead are often impediments through higher standards, unfunded mandates and further tax restrictions. This situation is not a blank check for assessing impact fees, however. That is where the apartment industry leadership comes into the picture. According to the report "Multi-Family Housing and Proportionate-Share Impact Fees," published June 29, 2005, (see "About the study") here are the top four action items:

1. Define "Proportionality" in Statutes. I conducted a study for NAA reviewing all impact fee enabling statutes and found a surprising few--only 10 of 25--actually used the concepts of "proportionality" of comparable terms, such as "reasonable relationship" or "pro-rata share ," in setting parameters for impact fee calculation, and fewer still defined such terms. Without guidance, local governments do not know what the statute means. NAA leadership should work with legislators in states with impact fee enabling acts to define these of related terms. For example, where the terms "pro rata," "reasonable relationship," "pro-portionate share " and the like are used, consideration should be given to amending existing statutes defining terms to the effect that:

"In the context of residential development, this shall mean assessing impact fees on a per capita basis with respect to residential unit type and where data are reasonably available on a per capita basis by number of bedrooms as defined by the U.S. Bureau of the Census or on the basis of living area as defined by local building codes."

How bedrooms are defined may vary by building codes used across the nation. Where bedrooms have been used in some jurisdictions as the basis on which to assess impact fees, there have been occasions where developers would avoid hanging doors on closets to classify a room as a den and not a bedroom. The purpose of tying the definition to the census is to give flexibility locally to assure that all bedrooms and dens that might be converted into bedrooms are part of the impact fee calculation.

The census defines bedrooms as: "The number of rooms that would be listed as bedrooms if the house, apartment or mobile home were on the market for sale or for rent. Included are all rooms intended to be used as bedrooms even if they currently are being used for some other purpose."

The alternative would be to use the size of the unit, perhaps heated and cooled square footage. This would have the effect of skirting the bedroom definition issue while still assuring that fees would vary by size of unit.

The effect of density and location on impact fee calculations could be addressed by modifying the definition of "service area" in statutes. Most statutes require that impact fees be based on service areas that are designed based on engineering and planning principles with little, if any, further elaboration. Such statutes might be amended to insert language to the effect that:

"As further guidance, service areas shall be designed to reflect substantial differences between them based on current and/or future density, pattern of development, availability of facilities unique to parts of the jurisdiction and physical features."

Density and pattern of development was used in the Scottsdale, Ariz., example noted earlier. Providing for "facilities unique to parts of the jurisdiction" allows for having service areas based on the presence or absence of such facilities as public transit and perhaps certain kinds of utilities. This should not be meant to preclude the use of geographically large service areas (which facilitate administrative efficiencies) so long as differences within them may be recognized, such as reducing road impact fees near transit facilities recognizing higher propensity of transit use accordingly. The Atlanta example previously mentioned comes to mind.

Virtually all statutes require use of specialized impact studies that would allow consideration of reduced impacts associated with particular conditions of a proposed development on a case-by-case basis. Nonetheless, at some place in such statutes--such as the definition of impact fees or the specialized study section of other location--language considering configuration could be included such as:

"(Cities, counties, local governments) are encouraged to include in their fee schedules special classes of development that by their nature reduce impact and thereby reduce impact fees that would otherwise be assessed."

2. Broaden the Base. Not mentioned earlier is an important inequity when it comes to impact fees for parks and recreation, library and school facilities. In the vast majority of communities, impact fees for these facilities are assessed only on residential development. (In California, statutes enable school impact fee assessments on non-residential development.) The entire burden is thus borne by residential development. Consider the principal cause of facility impacts, however: new jobs. One could easily trace impact to the new jobs created that attracted the workers who brought their families to live in the community. This is not to say that all impact fees should be assessed only on new jobs but neither should they be assessed only on residential development.

Perhaps apartment industry leaders could work with other interests to gain legislative support to amend enabling legislation to establish the general finding that all development impacts all facilities and also benefits from all facilities. At a relevant point in the statute, language may be added to the effect that:

"It is found that, unless demonstrated to the contrary, all facilities for which impact fees are enabled for assessment, collection and expenditure pursuant to this act are impacted by all development and benefit all development. It is found further that to assure (proportionate-share, pro-rata, reasonable relationship) principles as defined herein that all development shall be subject to impact fees based on those principles."

3. Count All Credits. One of the critical elements of impact fee design is giving proper credit for new development to avoid double charging, where new developments pay for facilities once through impact fees and again through new taxes they generate. There are three kinds of credits: external, revenue and in-kind, the latter two being of primary interest in assuring proportionality especially with respect to apartment units.

External credit occurs when a non-local government entity provides grants or other resources to acquire facilities for which impact fees are assessed and for which new development does not contribute revenues. Federal and state grants for roads would be an example. In this case, it is common to subtract the value of external resources from the cost of park facilities. The "net" cost becomes the basis for calculating the impact fee.

Revenue credit is given when new development generates new tax (property, sales, other) revenue that is reasonably related to financing the same facilities for which impact fees are assessed. Suppose a general obligation bond has been issued that borrows money to buy park land, and suppose there is also an impact fee to help pay for parks. New development contributes to the property tax base and logically a share of this new revenue helps retire the bond. The value of the stream of such new property tax revenue would be discounted usually over 20 to 25 years often at a rate of about 4 percent to 6 percent (roughly the average long-term Treasury rate). To avoid the complication of estimating this revenue credit for each individual development project, the estimated value of all new development over a 20 to 25 year period is used to establish this credit.

Care must be given to account for revenue credit. For example, while the Florida county noted earlier gives revenue credit reflecting new property taxes generated by new development to help pay for new schools, in fact it only accounts for about hall the credit that should be due. In Florida, state law enables local governments to assess a 2-mill property tax levy to help finance school capital costs. The tax is assessed on all development yet in this county only the value of new residential construction is given the credit. (See box," Accounting for credits", for a simple guide to use when studying impact fee reports prepared by local governments or their consultants.)

The last source of credit is at once obvious and complex. Obviously, if a new development constructs a facility that would have been financed from impact fees, the value of this in-kind contribution should be credited against the fee and usually is if the facility is on the list of those to be financed in part by impact fees. An example would be a park programmed for impact-fee financing that is constructed by a new development as part of its amenity package; a credit for the value of the construction and land (if it is also included) would be appropriate.

A more complex situation arises when a new development installs facilities onsite that reduce demand for facilities financed from impact fees offsite. A common example is with parks and recreation facilities, often constructed within master-planned communities. An argument can be made that if such facilities--even if located within a gated community that denies access to the general public--reduce demand for public parks, generally the developer should receive a reduction or "credit" of the impact fee for it. The question though is whether the actual demand for publicly provided park facilities is really reduced. Moreover, if the park was never on the list of improvements to be financed from impact fees, the question is whether any credit should be given. If credit is given, then some parks anticipated for impact-fee financing may not be built because of credit given for a private park inaccessible to the public. This is an area in need of further consideration.

However, an area where a stronger argument can be made for onsite credits is when direct service obviously reduces impact. Many larger apartment communities for example provide shuttle service to a variety of points, and this would clearly reduce road impacts. These sorts of credits would need to be calculated on a case-by-case basis, however, and may necessitate formal agreements to assure local government that in fact the service will be provided over the long term.

4. Be at the Table and Be Informed. Above all, apartment industry leaders need to become intimately involved in local impact fee policy-making processes. They need to volunteer to participate on impact fee advisory committees of become active advisors to such committees. Most enabling acts require a large share of advisory committee membership to be composed of representatives of the development community. It is my reflection, based on decades of experience, that apartment interests aee usually under-represented if represented at all.

To the extent possible, participate in drafting impact fee requests-for-proposals to highlight that successful bidders would be capable of calculating impact fees based on principles discussed throughout this article, and participate in the impact fee consulting selection process.

During the impact fee development process, and to the extent possible, provide data and analysis that may be used to advance proportionate share principles. To facilitate this, Virginia Tech has provided NAA with census data for every city, county and locality, and aggregations of geography to about 100,000 residents that may be useful to help craft impact lees consistent with the principles established in this article.

Question costs. A common complaint among those not involved in the process is that local governments want "gold-plated" facilities. By being involved in the process, costs can be studied and reasonable judgments made about their appropriateness. Be mindful, however, that often costs are understated because they ate based on historical experience of do not reflect all costs associated with improvements.

Finally, be vigilant when it comes to assuring that credits are addressed appropriately.

ARTHUR C. NELSON, Ph.D., FAICP 

About the Study

This article reviews highlights of a year-long study, "Multi-Family Housing and Proportionate-Share Impact Fees," published June 29, 2005, by Arthur C. Nelson, Ph.D., FAICP, and his graduate students at Virginia Tech for the National Apartment Association.

Impact Fees at a Glance

What is an impact fee?

Impact fees are one-time assessments on new development to help finance facilities needed to accommodate its facility demands. They are based on a proportionate-share calculation that assigns facility impact with respect to units of demand. Local governments use these fees to offset revenue not received from federal and state governments for a wide range of local public facilities.

How do impact fees affect the apartment industry?

All too often, impact fees assessed on apartments are not equitable--that is, they are disproportionate to impact. For example, local governments often fail to take into account the differences in occupancy levels between the major residential types, such as single-family detached, townhouse and apartment.

How can you help?

To help advance the interests of the apartment industry, owners and developers must:

* Define "proportionality" in local statutes;

* Broaden who bears the burden to include non-residential developments;

* Count all credits to avoid double charging; and

* Become intimately involved in the local impact-fee process.

Accounting for Credits

One of the critical elements of impact fee design is giving proper credit for new development to avoid double charging. Care must be given to account for revenue credit. Following is a simple guide to use when studying impact fee reports prepared by local governments or their consultants:

Total impact cost (total cost of facility expansion)

--Less non-local revenue assignable to the cost (Federal and state grants, e.g.)

--Less local private nonprofit revenue assignable to the cost (i.e. charitable foundations, non-profits)

--Less local tax revenue dedicated to capacity expansion (including tax revenues used to retire bonds sold to create capacity but not for rehabilitation)

= Equals net impact cost

/ Divided by service units created (new student "stations" or acres of park or library square feet, etc.)

X Multiplied by the impact units of development (i.e. persons per bedroom or students per 1,000 square feet)

= Equals maximum potential impact fee

Arthur C. Nelson, Ph.D., FAICP, is Professor and Director of Urban Affairs and Planning at Virginia Tech's Alexandria Center. He is the author of three books on impact fees with another forthcoming. He is considered one of the nation's leading authorities on the subject. Nelson can be reached at 703/706-8110 or e-mail [e-mail].