Impact Fee

Written By
Paul Tracy
Updated June 21, 2021

What is an Impact Fee?

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 Does an Impact Fee Work?

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 Does an Impact Fee Matter?

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.

Activate your free account to unlock our most valuable savings and money-making tips
  • 100% FREE
  • Exclusive money-making tips before we post them to the live site
  • Weekly insights and analysis from our financial experts
  • Free Report - 25 Ways to Save Hundreds on Your Monthly Expenses
  • Free Report - Eliminate Credit Card Debt with these 10 Simple Tricks
Ask an Expert
All of our content is verified for accuracy by Paul Tracy and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Impact Fee.
Be the first to ask a question

If you have a question about Impact Fee, then please ask Paul.

Ask a question

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

If you have a question about Impact Fee, then please ask Paul.

Ask a question Read more from Paul
Paul Tracy - profile
Ask an Expert about Impact Fee

By submitting this form you agree with our Privacy Policy

Don't Know a Financial Term?
Search our library of 4,000+ terms