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Impact Fees Unveiled: Navigating Legal Legitimacy

Updated: Mar 21

Unlike general taxes that are paid by all residents for government services, impact fees are paid solely by developers as part of the development approval process. They’re used as a way for municipalities to offset the additional costs incurred by the development. Concerns about the legality of imposing such fees has resulted in legal challenges.

State legislation enables local governments to 1) impose impact fees and 2) establish  guidelines for their implementation. In Alabama, impact fees can only be imposed for governmental infrastructure and costs directly associated with it. Impact fees, similar to zoning, are often subjective because the true cost of improving strained resources is often unclear and not well-defined.

Not surprisingly, legal challenges from developers and landowners are on the rise due to numerous factors including: increased development costs, the estimated cost impact of new development on infrastructure, and the inability to show a relationship between the fees and anticipated costs. Recent cases have raised questions about the constitutionality of excessive impact fees and how far local governments can go in imposing these fees.

In Sheetz v. County of El Dorado, which is currently before the U.S. Supreme Court, a resident of California sought a permit to construct a home on his lot zoned for residential use. The county levied a "traffic mitigation fee" of $23,420 on the permit. Although Sheetz challenged the fee, he eventually paid it to obtain his permit and then filed a lawsuit against the county.  The US Supreme Court is expected to issue an opinion this summer on whether this impact fee is subject to the heightened scrutiny under the Fifth Amendment Takings Clause.

In Krupp v. Breckenridge Sanitation Department, Breckenridge imposed a water plant investment fee on new developments as a condition of their land use approval. This was done so that the developers responsible for increased wastewater would pay for expanding the existing wastewater treatment facilities.  The Colorado Supreme Court ruled in favor of Breckenridge, albeit the ruling clarified key principles and criteria for assessing the validity of impact fees, emphasizing factors like a rational nexus for fee assessment and the importance of competent independent experts in fee studies.

While the verdict is still out on impact fees in the US, continued litigation may reshape the justification for impact fees and the way they are assessed.  For now, developers should be sure to anticipate and budget for them.  

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