Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Impact Fee

What it is:

Real estate developers pay an impact fee to cities or other municipalities to offset the town's cost of building the infrastructure to support a private real estate development.

How it works (Example):

Let's say Company XYZ wants to open a new store location at 123 Main Street. Company XYZ stores are very popular, and the opening is expected to draw a lot of traffic from customers and employees. The city council decides that Company XYZ must pay a $500,000 impact fee to offset the cost of widening Main Street and improving the sewer lines to accommodate the new store.

Why it Matters:

Impact fees are a tool for shifting part of the cost of providing new infrastructure to a community. Sometimes impact fees can be paid with contributions of land or other assets rather than cash. Once in a while, and depending on the law, impact fees are refundable if the infrastructure costs are less than the fee.

Impact fees can be contentious, particularly if the municipality wants to require the real estate owner to give up part of its land for public use (this can be a violation of the Fifth Amendment of the U.S. Constitution). Additionally, if they are too high, businesses might move elsewhere, taking jobs and their tax base with them.