(Originally published in the April 2008 Housing Journal)

Development Fees – Getting It Right

As more communities are trying to utilize development (or “impact”) fees to generate more funds it is clear some are complying with the processes established in New Mexico law, and some are going about it all wrong. While fees and “exactions” for developments pre-date the Development Fees Act, that 1993 law established rules for setting and using such fees.

The Development Fees Act was designed to set boundaries on the amounts and items for which developers could be charged, and purposely established a fair, equitable, uniform and site-specific mechanism for funding off-site infrastructure improvements. As the Legislature debated the “fairness” issues, they did not focus on developers or builders. They focused on the home buyer who eventually pays the impact fee, along with all other costs of a new home, and then often finances that amount over a 30-year mortgage. It is important to understand these concepts, as they are the foundations of the philosophy embodied into our Development Fees Act.

Development/impact fees are one of many options for infrastructure funding by local governments. Other ways to fund such improvements are General Obligation Bonds, Tax Increment Financing, Special Assessment Districts, and Public Improvement Districts. Because the municipalities and counties are more familiar with impact fees, and often feel it is easier than other options, they often default to development fees over other choices. However the downside of this, especially for home buyers, is that development/impact fees are arguably the least efficient method for furnishing necessary off-site infrastructure. Unfortunately when these decisions are being made those future home buyers are blissfully living someplace else.

This article is the second in a series on infrastructure financing options; the first of three parts on development/impact fees. New Mexico Home Builders Association is providing this information to help our membership and our local associations get involved in their community’s development fee process to facilitate “getting it right”, and taking action when the community leaders are “getting it wrong”. These decisions have big bucks impacts on new home buyers, the community, and even on the overall cost of all housing in your community.

Any review of the Development Fees Act or “impact fees” needs to start with a basic understanding of what the law intended them to be. Development/impact fees are imposed on new development in order to generate funding for off-site (think stoplights down the road from the subdivision, or wastewater treatment plant impact) capital improvements or facility expansions directly attributable to the new development. This concept is the basis for the rest of the law that explains the process for coming up with the correct amount of the development fee and how the community is to spend the money collected. On-site development capital improvements (think new subdivision drainage features or fire hydrants) are not an appropriate use for impact fees.

The Development Fees Act was passed by the New Mexico Legislature and signed into law in 1993 with the assistance and cooperation of the New Mexico Home Builders Association, New Mexico Municipal League and the New Mexico Chapter of the American Planning Association. The Act was presented to the New Mexico Legislature as a result of the construction industry’s frustration with the inequitable, and often inconsistent, assessment of infrastructure costs related to development projects.

The Development Fees Act did not create fees as a condition of development. It did, however, clearly delineate the items for which these fees may and may not be charged. This detail-rich Act includes the process for assessing development fees, the use or refund of the funds collected by the fees, the timing of the assessment of the fees and the timing of the payment of development fees, a process for periodically reviewing the fee itself, and when and how such fees may be waived for certain projects.

Improvements Allowed and Forbidden

As noted earlier, Development Fees are specifically for “off-site” improvements only. Off-site improvements are just that – infrastructure improvements that are not physically on the property being developed, as opposed to “on-site” improvements that are, and always have been, the financial responsibility of the developer. Development/impact fees may be charged for facilities that have a life expectancy of ten or more years and are owned and operated by or on behalf of a municipality or county. This includes:

water supply, treatment and distribution facilities; wastewater collection and treatment facilities, and storm water, drainage and flood control facilities;
roadway facilities, including roads, bridges, bike and pedestrian trails, bus bays, rights of way, traffic signals, and landscaping;
buildings for fire, police and rescue and essential equipment costing $10,000 or more and having a life expectancy of ten years or more; and
parks, recreational areas, open space trails and related areas and facilities.

Impact fees shall not be imposed or used to pay for:

construction, acquisition or expansion of public facilities or assets that are not identified in the capital improvements plan;
repair, operation or maintenance of existing or new capital improvements or facility expansions;
upgrading, updating, expanding or replacing existing capital improvements to serve existing development in order to meet stricter safety, efficiency, environmental or regulatory standards;
upgrading, updating, expanding or replacing existing capital improvements to provide better service to existing development;
administrative and operating costs of a municipality or county except that up to 3% of total impact fees collected for administrative costs for municipal or county employees who are qualified professionals preparing or updating a capital improvements plan;
principal payments or debt service charges on bonds or other indebtedness, except for costs directly related to the construction of the capital improvements or facility expansions identified in the capital improvements plan;
libraries, community centers, schools, projects for economic development and employment growth, affordable housing or apparatus and equipment of any kind, except for essential equipment costing $10,000 or more and having a life expectancy of ten years or more.

As stated at the beginning of 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. The Act is all about establishing the process for assessing impact fees, not about preventing them altogether.

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.

Next month: Part 2 of “Development Fees – Getting it Right”. 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.