An impact fee can be defined as a one-time fee that is imposed by a local government body on a real estate developer. Impact fees refer to the single payment made to the government by a property developer as compensation for the repercussions of such development on the existing public infrastructure. Such fees are exclusively evaluated by the government body and the estimation is done by taking into consideration a few factors. These factors include the total cost of the new public development in addition to the size and scope of the proposed infrastructure. In simple terms, impact fees are one-time payments that are levied for the construction of new infrastructure.
Development and construction of new infrastructure prompt the arrival of new residents, who in turn would require facilities and services such as schools, libraries, water and sewage treatments, and protective services like police and fire departments. Now, the maintenance of such services is to be handled by the government bodies as a result of which they are faced with considerable financial burdens. Hence, impact fees are levied in this context in order to neutralize the expenses when it comes to maintaining the aforementioned facilities.
It should be noted that the impact fees that are imposed on a real estate developer with respect to a particular project, cannot exceed the proportionate share of the total cost of the construction.
Impact fees act as a popular substitute for increased property taxes. It is a preferred alternative to paying special taxes for the development of new infrastructure. People who are property owners in an expeditiously developing area would often prefer to have the property developers pay a one-time impact fee rather than paying special property taxes themselves. This is because, in this way, the burden of financial compensation for the new developments in such properties typically falls on the developer and not the taxpaying property owners. It should be noted that impact fees may act as discouraging impediments for most developers as they significantly increase the total cost of the construction project.
As a result of this dissuasion faced by developers, there may be a huge loss in potential employment opportunities in that area. However, certain research shows that the concept of impact fees is more efficient in increasing revenue for development in comparison to property taxes. This is because property taxes are often unsuccessful when it comes to meeting the financial needs of municipalities.
