By Pat Curry. For the home buying public, impact fees are the hidden costs that push new-home price tags ever higher. For builders, they are simply a cost of doing business, a necessary evil. They are also the only effective mechanism for funding what's needed to support new-home communities. Or, at least, they've come to be seen that way in many jurisdictions. In fact, there are alternatives. At least five options to impact fees have been offered up -- and tested -- by developers, builders, industry consultants, and state home builder associations (see "Impact Zone"). Perhaps one of these will suit your next project.

TIF bonds. Instead of just lobbying state and local governments to dump impact fees, the National Association of Realtors promotes the use of tax increment financing (TIF) bonds. An alternative to politically risky general obligation bonds, TIF bonds don't require voter approval or raise anyone's taxes, says Bob McNamara, policy representative for the association.

The tax-free municipal TIF bonds utilize a development zone in which a specific need has been identified, such as water and sewer lines or road improvements. The bonds are issued based on the increase in property values that will result from the improvement. The base line for property taxes continues to go to the government's general revenue fund, with an amount above that level dedicated to guaranteeing the bond.

"Every situation is unique," McNamara says. "In most cases, the increase in value will more than cover the cost of the bonds."

Special improvement districts. Called different names from state to state (they're known as Mellow-Roos districts in California), special improvement districts can utilize impact fees to fund bond issues. Impact fee consultant James Nicholas, at the University of Florida, cites a district that was created to fund an interchange of Interstate 5 in California. "They adopted an impact fee in the benefit area so the properties that would be developed would pay for it," he says. The property owners paid $78 million in impact fees; with the interchange, the properties subsequently were valued at $250 million.

Photo: Peter Cade/Getty Images/Stone

Officials in Alpharetta, Ga., established a similar district to fund three new fire stations. A fire impact fee of $195 per unit is paying off the bond issue to build the stations. Because of the three new stations, the city's fire code rating dropped, saving each homeowner about $100 a year on insurance. "They never once charged the taxpayers for the bonds," Nicholas says. "That's a good deal for everybody." Trade infrastructure for credits. Negotiating for better terms on fees is nothing new for builders, but the following case study offers some food for thought. Rottman Froman Communities, in Encino, Calif., created a plan to reduce its water capital contribution and connection fees on a master planned community in Calaveras County, southeast of Sacramento. The 3,251-acre Oak Canyon Ranch is designed for 2,275 single-family homes, 1,200 resort units, two golf courses, and a village center.

Maury Froman, president of Rottman Froman, says the developer had its engineer update the master plan for the water basin -- which includes existing homeowners -- who had complaints of low water pressure and increasing rates. In cooperation with another master plan builder, Rottman Froman was able to redesign the water system to create a loop.

"It gives a better balance to the system and people get water from two directions," Froman says. "If there's a problem, they're not without water for any period of time."

As a result, their fees were reduced between 15 and 20 percent, he says.

DIY. In sewer connection fees, Rottman Froman found it cheaper to build its own sewage treatment system than to pay the cost of connection fees. They'll also build and maintain their own roads. "Our community, for the most part, will be self-sustaining," Froman says.

Becky Pieroni says self-contained is the way to go. A Phoenix, Az.,-based attorney who specializes in master planned communities and legislative issues affecting home builders, she often handles infrastructure finance issues. "We just go self-contained all the way to stay out of that arena because it gets abused so much," she says. "We do our own water and sewer, and build fire stations and police stations. We go completely stand-alone from any municipal interaction at all."

Combo platter. Nicholas says that combining impact fees with other funding sources makes the most sense for funding infrastructure. Palm Beach County, Fla., "had everything on the table at once" to pay for desperately needed road improvements. Motorists were assessed an additional 12 cents a gallon in gas taxes and developers got a $4,000 impact fee. "They've got a big budget now to build roads," he says.

In Alpharetta, Ga., officials combined impact fees with ad valorem bond issues to leverage $13 million in impact fees into a $60 million road improvement program. Nearby Canton, Ga., combined bond issues and impact fees for $40 million in park improvements.

Todd Young, spokesman for the Greater Atlanta Home Builders Association, says the city of Atlanta lost out on state and federal matching funds because of its impact fee policies. The association is suing the city in federal court, charging that the city violated state law by spending impact fee dollars in a distant part of the city.

"Instead of $20 million [the amount collected since 1993], they could be talking about having $60 million to $90 million in play," Johnson says. "That's the shame of not doing it right. If you do it right, there are programs in place to respond."

Published in BIG BUILDER Magazine, January 2003