(Originally published in the July 2008 Housing Journal)

Development Fees – Getting It Right

The April issue of the Housing Journal contained the first part of our article about development/impact fees, discussing the philosophy behind the fees, and items for which the fees could be assessed. Our May issue contained a discussion of service areas. This article concludes our discussion. It is provided to help the development community understand our state law and get involved in their municipality’s development fee process to facilitate “getting it right”, and taking action when the municipality is “getting it wrong”.

To refresh readers’ memories, the Development Fees Act was designed to set limits on the items for which developers would be charged, and purposely established a fair, equitable, uniform and site-specific mechanism for funding necessary off-site infrastructure improvements. The Act is all about establishing the process for assessing impact fees, not about preventing them altogether.

Capital Improvements Advisory Plan and Committee

Early in the process, the Development Fees Act requires the municipality or county to establish a Capital Improvements Advisory Committee. The advisory committee must be composed of at least five members appointed by a majority vote of the governing body. Not less than 40% of the membership of the advisory committee must be representative of the real estate, development or building industries. No members shall be employees or officials of a municipality or county or other governmental entity.

The advisory committee duties include:

advise and assist the municipality or county in adopting land use assumptions;
review the capital improvements plan and file written comments;
monitor and evaluate implementation of the capital improvements plan;
file annual reports with respect to the progress of the capital improvements plan and report to the municipality or county any perceived inequities in implementing the plan or imposing the impact fee; and
advise the municipality or county of the need to update or revise the land use assumptions, capital improvements plan and impact fee.

The municipality or county must provide any professional reports on the development and implementation of the capital improvements plan, and must adopt procedural rules, for the committee.

Public Comment

Each municipality or county that wants to impose impact fees must hold a public hearing to consider land use assumptions within the designated service area. These land use assumptions will be used to develop the capital improvements plan (CIP), then adopt (by resolution or ordinance) the land use assumptions. This process is not allowed to be adopted as an emergency measure, and will take months to accomplish. Paid consultants are often retained to help. State law spells out the requirements for publishing the public notices for the hearings on the CIP, and when the CIP is to be made available to the public.

The Development Fees Act prohibits a municipality or county from placing a moratorium on new development just to wait for the completion of all or any part of the process necessary to develop, adopt or update impact fees.

The municipality or county must update the land use assumptions and CIP at least every five years. The initial five-year period begins on the day the CIP is adopted.

Accounting for Fees & Predictability

Impact fees cannot exceed the cost to pay for a proportionate share of the cost of off-site system improvements, appropriately allocated over the new development, needed to serve new development.

Assessment of an impact fee is required to be made at the earliest possible time, and collected at the latest possible time. The Act prohibits collection of impact fees prior to the issuance of a building permit. For land that is platted after the Act became law in 1993, the fees must be assessed at the time of recording the subdivision plat, and the assessment is valid for at least four years. At the end of the four-year period, the municipality or county may adjust the impact fees to the level of current impact fees. Other than this, additional impact fees or increases in fees may not be assessed for any reason unless the number of “service units” to be developed increases.

The order, ordinance or resolution imposing an impact fee must provide that all money collected through the adoption of an impact fee shall be maintained in separate interest-bearing accounts clearly identifying the payor and the category of capital improvements or facility expansions within the service area for which the fee was collected. Interest earned on impact fees becomes part of the account on which it is earned, and money from impact fees may be spent only for the purposes for which the impact fee was imposed as shown by the CIP.

The records of the accounts into which impact fees are deposited are to be open for public inspection. As part of its annual audit process, a municipality or county must prepare an annual report describing the amount of any impact fees collected, encumbered and used during the preceding year by category of capital improvement and service area. Many municipalities and counties are not complying with this section of the Act, and a few have publicly stated the process is just too much of a bother for them. Collecting impact fees without properly accounting for the money is illegal activity.

“Use It or Lose it” Seven-year Deadline

The municipality or county has seven years in which to either build the capital improvement or provide the service for which impact fees were collected. An owner of the property on which an impact fee has been paid has the right to a refund if the service is not provided or the new facility has not been built. A refund bears interest calculated from the date of collection to the date of refund at the statutory rate. All refunds must be made to the owner of the property at the time the refund is paid. If the impact fees were paid by a governmental entity, payment goes back to the governmental entity.

Upon completion of the capital improvements or facility expansions identified in the CIP, the municipality or county must recalculate the impact fee using the actual costs of the capital improvements or facility expansion. If the impact fee calculated based on actual costs is less than the impact fee paid, including any sources of funding not anticipated in the CIP, the municipality or county must refund the difference if the difference exceeds the impact fee paid by more than ten percent, based upon actual costs.

Credits, Waivers and Fee Reductions

Governmental entities must pay all impact fees on their construction projects, but affordable housing developments may have their impact fees waived provided the housing development is built to benefit those whose income is at or below eighty percent of the area median income and who will pay no more than thirty percent of their gross monthly income towards such housing. Municipalities or counties may spend funds from any lawful source or pay for all or a part of the capital improvements or facility expansions to reduce the amount of impact fees. A developer and a municipality or county may agree to offset or reduce part or all of the impact fee assessed on that new development, provided that the public policy which supports the reduction is contained in the appropriate planning documents of the municipality or county and provided that the development’s new proportionate share of the system improvement is funded with revenues other than impact fees from other new developments.

Anything a developer provides in the way of supplying on-site or off-site facilities or improvements in excess of the minimum standards required by a community as a condition of development approval must be credited against impact fees assessed on the development. The credit includes the value of: land for parks, recreational areas, open space trails and related areas and facilities, and dedication of rights of way, on-site water distribution, wastewater collection or drainage facilities, or streets, sidewalks or curbs. Credits can be sold by the developer to other parties.

As stated earlier in this article, the Development Fees Act was designed to set boundaries on the items for which developers would be charged, and purposely established a fair, equitable, uniform and site-specific mechanism for funding off-site infrastructure improvements. Participation from New Mexico Home Builders members in the process by sitting on the Capital Improvement Plan Advisory Committee and attending every land-use assumption public meeting can get the process headed in a direction our members like.

If you would like a pdf file of the Development Fees Act e-mailed to you, call Melanie Teeter at the NMHBA office at 505-344-7072, or e-mail to her at melanie@nmhba.org.

You can also see an explanation of the Tax Increment Development District infrastructure financing law from the January 2008 Housing Journal online at www.nmhba.org. Coming in a future issue will be another in this infrastructure financing series, on Special Assessment Districts.