Impact Fees Crimp New Construction Projects

High local government impact fees are beginning to affect the construction of entry-level homes. Residential builders must factor in these government fees and assess whether they can pass the cost on to consumers before undertaking new construction projects. This has made it more difficult in some areas for young families to purchase their first entry-level home.

What is an Impact Fee?

An impact fee is a tax assessed by municipalities when construction firms get their building permits. The idea behind an impact fee is that new construction carries with it ancillary costs. The impact fees help fund schools, roads and public transportation infrastructure which needs to be built to keep up with the incoming population. These funds are earmarked to help local jurisdictions deal with the increased burden on city resources that generally come with population growth.

Why Is the Impact Fee a Problem for Homebuilders?

Residential homebuilders have a large initial cost regarding purchasing raw land and developing it into a finished home. Additionally, costs associated with selling these homes start adding up close to the Federal Housing Administration (FHA) loan limits which vary by county. New homebuilders rely on their potential buyers having access to these FHA loans (who charge a very modest 3% down payment) to make these homes affordable. An impact fee squeezes the margins of entry-level residential homebuilders, with luxury homebuilders better able to pass on the impact fees to their buyers.

Examples of Impact Fees across the United States

The main criticism of impact fees is that they have increased in many areas across the country even as real estate prices are still affected by the housing crisis that started in 2008. According to Zelman & Associates, the national average for impact fees is around $21,000 per unit of housing. The impact fees are highest in California (San Francisco tops the list at $72,000) and the West in general while lowest in the Southeast. Austin, Dallas, Atlanta and Raleigh remain affordable with regard to impact fees while Denver's government is trying to set a course for higher impact fees.

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