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.

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Paul Tracy
Paul Tracy

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.

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