An increasing number of cities are reducing or suspending impact fees; implementing tax rollbacks; and offering additional incentives in a desperate attempt to stimulate development activity.

The rollback of impact fees—which municipalities often require developers to pay in order to cover the costs of expanded infrastructure and public services—is the most common tool used by cities to spur development. Cities are open to the idea because they have little to lose: Few new building permits means they aren’t receiving much money from developers in the first place.

“This summer, there has been a lot of activity, notably in Georgia, Florida, and California,” says Thais Austin, infrastructure and public finance specialist for the Washington, D.C.-based National Association of Home Builders. “Once one community starts cutting impact fees, it’s easier to make the case. After one city has done it and the world hasn’t fallen apart, the level of comfort increases.”

Most recently, at the end of July, Loveland, Colo.’s city council voted to roll back the city’s capital expansion fees for developers of multifamily housing and duplexes by about 25 percent. Certain expansion fees were not reduced, while nine others were lowered by 61 percent. The net effect is to reduce the fees on a multifamily unit from about $23,000 to about $17,000, according to the city council.

But Ed McMahon, a senior resident fellow at the Washington, D.C.-based Urban Land Institute, doesn’t think reduced impact fees will translate into increased development activity. “I don’t think these rollbacks will produce much new development. The reason development is not taking place has little, if anything, to do with development impact fees,” McMahon says. “It has to do with the marketplace; it has to do with the lack of financing.”

El Paso Gets Creative
The city of El Paso, Texas, recently announced its latest in a string of incentives to encourage development and accommodate the estimated 67,000 new troops and dependents heading to Fort Bliss over the next two years. In late July, the El Paso City Council approved a program that will offer developers a five-year break on city property taxes if they build complexes with more than 150 units. (Multifamily Executive reported on other incentive programs in El Paso earlier this year.)

Atlanta-based developer Place Properties, for one, plans to take advantage of these new tax incentives. “I think the underlying significance of these new incentives is the message it sends not just to developers but to capital providers that there is money to be made in new construction in El Paso,” says Trevor Tollett, the firm’s development manager for the El Paso market. “This is important in today’s environment where a lot of the capital is either sitting on the sidelines trying to make sense of the market or hunting for distressed assets.”

But these tax incentives is by no means a cure-all, adds Gary Sapp, president of the Southwest Division of Hunt Development Group. “The incentive is written in such a way as to only benefit a few developers who are already well along in their development plans, or will be very soon,” Sapp says. “This will be a welcome windfall for those few, but the dollars will not close the fundamental gap between market rents and new construction costs.”

Big Impact?
Here’s a look at five cities that have implemented impact fee rollbacks* so far this year.
Locale Action
Fremont, Calif. Lowered impact fees by 75% in an effort to attract more residential construction and business to the area
Bradenton, Fla. Approved the suspension of impact fees for one year; impact fee collections for parks have declined by 75% since the housing downturn began in 2007
Naperville, Ill. Approved a one-year moratorium on road impact fees in response to an initiative by the Naperville Development Partnership, which is working to recruit commercial businesses in the city
Bonita Springs, Fla. Approved a rollback for road impact fees along the main commercial area of the city; businesses that can access the rollback must occupy at least 1,000 square feet of space
Cabot, Ark. Unanimously approved the elimination of impact fees as a method to stimulate the home building industry; alternative financing mechanisms are being considered for the construction of the new fire station

Source: National Association of Home Builders
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