A Primer on Development Impact Fees

"Impact fees are one-time payments from property developers to municipal, county, or school district governments for off-site improvements necessitated by new development. Fees may be based upon square footage, number of bedrooms, number of bathrooms, or other housing characteristics depending upon the use of the funds. These fees may be authorized by state enabling statutes or, in some states, may be imposed without legislative approval under the general home rule or regulatory authority granted by state constitutions and statutes. Impact fees differ from user charges as defined by the Census Bureau because they fund capital expenditures, not current consumption." (1)

The basis for development impact fees is the New Mexico Development Fees Act, [5-8-1 to 5-8-42 NMSA 1978]. This statute authorizes counties and municipalities to enact or impose development fees.

Municipalities may impose development fees for:

"(1) water supply, treatment and distribution facilities; wastewater collection and treatment facilities; and storm water, drainage and flood control facilities;

(2) roadway facilities located in the service area, including roads, bridges, bike and pedestrian trails, bus bays, rights of way, traffic signals, landscaping and any local components of state and federal highways;

(3) buildings for fire, police and rescue and essential equipment costing ten thousand dollars ($10,000) or more and having a life expectancy of ten years or more; and

(4) parks, recreational areas, open space trails and related areas and facilities;"

"Impact fees shall not be imposed or used to pay for... libraries, community centers, schools, projects for economic development and employment growth, affordable housing or apparatus and equipment of any kind...."

Fees may be collected only for improvements identified in a capital improvements plan. The municipality must commit to complete construction within seven years.

Fees shall be maintained in separate interest bearing accounts... The records of the accounts into which impact fees are deposited shall be open for public inspection and copying during ordinary business hours...

As part of its annual audit process, a municipality shall prepare an annual report describing the amount of any impact fees collected...

Las Cruces imposes fees on water, wastewater and parks only.

Las Cruces has enacted an ordinance Sec. 2-891 establishing a Capital Improvements Advisory Committee. The committee is to have five members.

"No more or less than two of the five members must be representatives of the real estate, development or building industries, including businesses that finance, underwrite or lend money for real estate, development or building purposes."

The committee is charged to:

"(1) Advise and assist the city in adopting land use assumptions, which include a description of the service area and projection of changes and land uses, densities, intensities and population in the service area over at least a five year period;

(2) Review the capital improvements plan that identifies capital improvements or facility expansion for which impact fees may be assessed, and file written comments;

(3) Monitor and evaluate implementation of the capital improvement plan;

(4) File annual reports with respect to the progress of the capital improvements plan and report to the city through its city manager any perceived inequities in implementing the plan or imposing impact fees;

(5) Advise the city of the need to update or revise the land use assumptions, capital improvements plan and impact fees; and

(6) Advise the city regarding growth management strategies.

The committee is to submit written reports to Council. The state law requires public hearings on land use assumptions, capital improvements plan and development impact fees."

Land use assumptions in the form of service area projections are found in the "City of Las Cruces Water and Wastewater System Master Plan Update", June 1995 by Montgomery Watson and Molzen-Corbin & Associates. If these projections were updated, the data would come from Brian Denmark in Development Services.

The City issues bonds to pay for water and wastewater improvements rather than build up a fund ahead of construction. If the fees were put in a fund to pay for future infrastructure, there would be the temptation to appropriate the fund for other uses. The debt service on the bonds is the basis of calculations of impact fees. The unit of service on which fees are based is maximum water flow for the size of meter installed.

Pros and Cons (1)

"Proponents of impact fees argue that impact fees require new development to pay its own way. Implicit in this argument is the belief that growth does not pay for itself, but instead imposes new service delivery costs on existing residents that are not fully recovered through future property taxes. Impact fee proponents also argue that the fees actually allow development to occur that local governing bodies and voters otherwise would not permit. They also argue that impact fees are an important growth management tool that allows localities, by setting fees at different levels, to steer growth to areas where infrastructure is underutilized and away from areas where infrastructure is inadequate to accommodate growth.

Proponents also argue that impact fees allow localities to use a "pay as you go" financing arrangement for new projects that avoids using general obligation debt. This improves the financial position of the locality and reduces the cost of borrowing for other capital needs. Finally, proponents argue that impact fees add certainty and specificity to the planning process because, unlike exactions negotiated with each individual project, impact fees are known in advance.

Opponents argue that impact fees subsidize existing residents by paying for improvements that benefit all property owners. In the case of schools, for example, education provides statewide benefits that do not accrue only to specific property owners in a development. Opponents also argue that impact fees provide a windfall gain to existing residents because by increasing the price of new homes they also increase the value of existing homes. Opponents also argue that impact fees make housing more expensive and put homeownership out of the reach of lower- and moderate-income households." (1)

Note the term "lower- and moderate income households" as opposed to "affordable housing". By state law, impact fees cannot be used to provide affordable housing, defined as "any housing development built to benefit those whose income is at or below eighty percent of the area median income; and who will pay no more than thirty percent of their gross monthly income towards such housing". Community Development Block Grant (CDBG) funds could be used to pay impact fees for affordable housing. The City's initiatives in providing affordable housing are found in "City of Las Cruces 1998 - 2002 Consolidated Plan" developed by the Neighborhood Development Department.

The City Infill Policy Plan contains comments on development impact fees:

Development impact Fees:

All vacant lots within the Infill Study Area are affected by Development Impact Fees at the time of any proposed development. In 1993, the New Mexico State Legislature approved the Development Fees Act. This Act establishes formal procedures for municipal and county governments within the state to impose impact fees on land within their respective boundaries. Impact fees, as defined within the New Mexico State Statutes, are a "charge or assessment imposed by a municipality or county on new development in order to generate revenue for funding or recouping the costs of capital improvements or facility expansions necessitated by and attributable to the new development...".

The City of Las Cruces adopted a development impact fees ordinance in accordance with the State Statutes in June 1995. Prior to the legislation, the City of Las Cruces did have impact fees that were assessed to new development(s) for water, wastewater, natural gas, and public parks. The current impact fees only relate to water, wastewater and park development for new residential developments and water and wastewater only for commercial and industrial developments. Cities and counties may not impose an impact fee for natural gas under the current Development Fees Act within the State Statutes. The amount of the impact fees is determined as part of the required Capital Improvement Plan (CIP) for the City.

Vacant or infill parcels are assessed the same amount for impact fees as are assessed for the remainder of the city, this was also true for the previous impact fees chat were assessed prior to the state legislation. Future impact fees, depending upon statutory authority, and as currently written would be assessed the same for all new development within the city limits, including infill parcels. Examples of such future impact fees could be for road and transportation improvements and storm drainage infrastructure.

Under the Development Fees Act, the City may waive or reduce the established impact fees for specific developments or parcels, such as those dedicated to affordable housing, provided that the impact fees are recouped from an identified revenue source other than impact fees. This may include the City's general fund in the short term or the respective utilities' rate base in the long-term future. In doing so, this may be requiring the City's taxpayers to pay development costs for vacant infill parcel development.

Repayment of the City's bond for capital improvements is generally tied to specific revenue sources, such as the impact fees. By allowing such revenues to be waived or reduced may be considered to be placing the City's bonds in technical default.

The City's development fees, which are based upon an adopted Capital Improvement Plan (CIP), are based upon growth projections for the City. According to City Utility Staff, the City's growth is less than what was projected within the CIP and has resulted in the City modifying plans to extend long-term capital improvements such as new water wells and sewer treatment plant expansions. In order to change the current development impact fees, the City would have to amend the CIP and the growth projections. The CIP is mandated to be updated every five years with the next earliest update scheduled to be completed by July 2000. Also, once impact fees are adopted by the City, which was done in June 1995 the impact fees cannot be amended for at least four years. Development impact fees are in addition to required one-time connection fees and monthly utility rates that the users pay for each utility.

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