The Real Cost of Building Homes

Caveat emptor

When it comes to choosing a new home there are many decisions to be made and costs to consider. Those looking for a new home tend to focus on both the functional and fun costs. The spacious kitchen. The additional bedroom. The energy efficient washer and dryer (yes, those are fun to some of us!). Builders look hard at time, labor, materials, and inspections. But there are also community costs that may appear to be “hidden.”

What do you need to know?

What Are the Community Costs Associated with Building?

When new housing and housing developments are constructed, there is an impact on existing sewer systems, water systems, wastewater treatment facilities, parks and recreational facilities, roads, bridges, and other infrastructure. The demand on these systems and for these services increases. It’s simple: more people/demand = more infrastructure.

This makes sense: think of land that is being developed for new single-family, detached homes, townhomes or a new apartment complex. Dozens of people (or more, depending on the size of the project) will be utilizing the existing water and sewer systems, for example. Additional funds may be necessary in order to accommodate the increased demand on these systems and to make critical updates to ensure residents are provided with reliable and consistent service.

Who pays impact fees? Typically, it is anyone seeking a building permit for a new development. However, the ultimate cost is borne by the homebuyer or renter as these costs are passed on in the cost of the lot and ultimately the price of the new home. Again, the intention of impact fees is to offset the additional cost of maintaining and upgrading systems and services so they can accommodate the growth facilitated by the new development.

The Monetary Impact of Impact Fees

Now the big question: how much are impact fees? The short (and likely frustrating!) answer is it depends. Indiana law provides that local authorities can assess and collect impact fees as long as they adhere to the guidelines set forth by the legislature.

In many Indiana communities, new homeowners will pay fees for such things as sewer connections and impact fees and developers must consider such things as inspection and plat fees when planning a project. These hidden fees can run from $125-$8500 per home.”

Impact fees vary from municipality to municipality, as do aesthetic standards. These are important factors to be aware of when you are choosing your new home.

Legal and Equitable Impact Fees Help Build Strong Communities

The keywords here are legal and equitable. When implemented correctly, impact fees raise the level of service not just for a new development but for the entire community. The revenues generated benefit everyone who lives there – not to mention those who work and visit in the area.

When those fees are not assessed or collected in accordance with the law, however, the opposite is true: the community suffers. No one loves paying fees or taxes, but we do so because we believe those monies contribute to essential infrastructure and services. If that fundamental belief is not there, discontent and distrust fester.

A Quick Case Study

In 2005, Zionsville officials started the process of adopting a park and recreation impact fee. Under Indiana law (Code 36-7-4-1300), they needed to establish an Impact Fee Advisory Committee. The committee would conduct a parks and recreation impact fee study, including a full assessment of the current system and future needs.

Long story short, the committee landed on a park and recreation impact fee of $1054 per lot or unit. Perfectly legal under Indiana code and supported by builders and industry associations. However, not long after, Zionsville’s Park Impact Fee Advisory Committee increased the amount to $1862, claiming it was more in line with national averages. The higher fee was adopted by the Town Council.

This impact fee did not comply with Indiana law, and advocates took legal action. Ultimately, a Boone County Superior Court judge found that the fee did, in fact, violate the Impact Fee Statute in several ways:

• Officials attempted to charge new developments with the full cost of facilities/upgrades that would serve the entire community, contrary to the statute. For example, they estimated the cost of a future park facility and annexation and divided it by the number of new permits alone. Statute mandates that fees are calculated only on actual infrastructure needs caused by new developments – not speculative needs or future additions.
• The claim that a “national average” was used was found to be invalid. Indiana requires that impact fees are directly related to the cost of construction or expansion necessary to accommodate the new development.
• The fee plan did not include key elements required by law, including the timeline of infrastructure installation, a description of the funding sources and amounts of money to be used for infrastructure projects, and a description of the “nature, location and cost of infrastructure that is necessary to raise the current level of service to the community level of service.”
• Zionsville did not consider non-local revenues when establishing the park impact fee.
• They also included “semi-public” park facilities that do not belong to the town in their calculations.

In this case, park impact fees were neither legal nor equitable.

Legal impact fees are one method of financing infrastructure. They can help mitigate the impact of new development. They are not intended to be blank checks that municipalities can cash to fund projects beyond the scope of the law.