In Featured, Research Article

By Nicole Kissam and Sara Mares

When development comes to town, or when it seems that funding is short to pay for services and facilities to serve new development, it is good to know about three critical tools available to address needs:

  1. The Development Impact Fee program is a tried-and-true method of funding new development’s share of capital facilities costs.
  2. The Fiscal Impact Analysis quantifies the net impacts and long-term projected costs of services and/or facilities.
  3. The Community Facilities District is a flexible tool that can fund both services and facilities.

The tool or combination of tools right for your agency will depend on the specifics of a developer’s request, which tools are currently in place, and other factors associated with local policy directives.

Benefits vs. Demands

New development in—or land annexations to—a public agency can offer tangible benefits to a community through increased housing supply, business opportunities and jobs, and increased spending in retail and tourism projects. While additional tax revenue will certainly come from new development, it also increases demands on public facilities and provision of services. These demands must be examined as part of the due diligence before approving any development or annexation. Once the impact of the project is understood, the municipality can then make informed policy decisions with respect to conditions of approval.

The specific impacts of new development on the provisions of facilities and services are quantified in a Development Impact Fee (DIF) Study or Fiscal Impact Analysis (FIA), respectively.

Financing Facilities

To finance the impacts of new development on essential local infrastructure, a solid Development Impact Fee program is critical to success. Development impact fees are one-time charges imposed as a condition of development
approval to pay for capital facilities and infrastructure needed to serve new development. Impact fees are governed by the California Mitigation Fee Act (Government Code Section 66000 et seq.). The Development Impact Fee Study combines development data, level of service indicators, and capital cost information to make essential findings required by the Act. These include:

  1. The purpose of the fee
  2. The use of the fee and the reasonable relationship between the fee and the type of project
  3. The need for a facility and the type of project upon which it is imposed
  4. The amount of the fee and the facility cost attributable to the project

A typical fee program will include variable fees by development type, such as fees per unit for new residential development and fees per square foot for new commercial development.

Advantages of development impact fees include no voter approval requirement to adopt, they are not subject to tax
limits or Proposition 218, and they are an important source for CEQA mitigation. Challenges associated with development impact fees are that the revenue received is limited to funding of capital facilities (no operational costs allowed) and there may be a lag in cash flow depending on the current pace of development.

Funding Services

The scope of an FIA can be either specific to a development or annexation or an agency-wide look at buildout. All ongoing revenue sources are considered, such as property tax, sales tax, hotel occupancy tax, documentary transfer tax, etc., and then compared to the cost of public services, such as public safety, roads, parks and public buildings, libraries, etc. Both the revenue and cost of service depend on the type of agency. A city will have a longer list of both revenue and services provided than a single-purpose special district.

Once the revenue and cost of services are quantified, those are allocated to future development utilizing either a case study approach or multiplier approach. The case study approach relies on area- or development-specific data to estimate the fiscal impacts, while the multiplier approach relies on an average per-person-served multiplied by either residents or employees served. To differentiate between land uses, the FIA must determine the persons per each land use category being examined. For residential uses, this is typically measured on a per-dwelling unit basis and for non-residential uses, this is typically measured on a per 1,000 building square feet basis.

The revenue and costs of service are then compared to identify either a positive or negative fiscal impact. It is not unusual to determine that some land uses have a negative impact, while some have a positive impact. Because services are to be provided to the new development or annexation in perpetuity, a mechanism must be established to collect the identified annual negative amount on an ongoing basis.

Community Facilities District as Implementation Tool

Increasingly, a Community Facilities District, or CFD, is the preferred tool for funding the impacts related to both services and facilities. In this sense, a CFD proves itself to be a flexible and accessible tool for funding both service costs and capital costs with the same revenue tool. On the services side, the CFD can levy a special tax for the negative fiscal impacts, any administrative costs of the CFD, as well as project-specific costs such as subdivision entry monument and landscaping maintenance. Note that not all services identified in the FIA may be authorized services under the CFD, but its flexibility makes it a valuable instrument.

CFDs can also be used to finance the amount of development impact fees due from a developer based on their specific project, should the public agency wish to allow the flexibility of financing those fees to a developer. For tax purposes, when development impact fees are financed via a CFD there must be a reasonable expectation of spending the bond proceeds within three years.

For help determining which tool is best for your agency and situation, contact NBS. Whether you settle on a Development Impact Fee Study, a Fiscal Impact Analysis, or form a Community Facilities District, the result is
more “coin” for your community programs.

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