Developers Prep for Impact Fees

The cost of doing business in Fayetteville could be going up thanks to road impact fees and it’s no surprise local developers have lined up against the idea.
Approved by the city council Jan. 16 and sent to the citizens for an April 10 vote, the proposed impact fees will range from nearly $5,000 on a new home to six figures and more on large-scale commercial projects.
Developers like Hank Broyles and Ben Israel argue strenuously that road impact fees are an unfair burden on both individuals who buy a new home and businesses who move into a new building because they are paying to improve the roads all citizens travel.
Not only that, developers point out, Fayetteville could lose future sales tax revenue if businesses locate elsewhere in Northwest Arkansas to avoid paying impact fees. And voters could actually see their property taxes increase if home prices are artificially inflated by impact fees added to sale prices.
The road impact fees have been sold as a charge on new development, but over the long term, studies have shown they will be felt most in lower prices for sellers of raw land.
“Malls, retail and offices — those are our job creators,” Broyles said. “To make it more difficult for them to come to Fayetteville is wrong.”
Israel, president of Dixie Development and nearing completion of a 66,000-SF office building at the corner of Joyce Boulevard and Old Missouri in Fayetteville, said the proposed impact fees would have added $178,000 to his loan and cost his future tenants a total of $371,000 over the 20-year life of the note.
“It won’t cause me to quit developing in Fayetteville,” Israel said. “But it will cause Fayetteville to be less competitive in the marketplace for office buildings and homes.”
Broyles agreed he wouldn’t bear the cost of impact fees. Developers will pass them along to their tenants in the form of higher rates, which could price Fayetteville out of the picture for a business looking to expand or relocate.
Developer Debate
Developer opposition to impact fees has been around for as long as the fees themselves, but more and more states are passing legislation enabling cities to levy these charges in lieu of tax increases to fund infrastructure expansion.
In addition, there is no shortage of studies from states such as Florida — which began imposing impact fees more than 20 years ago — showing impact fees don’t hurt growth. In fact, fees can aid economic expansion.
Five of the top 10 performing mid-sized cities in terms of job growth during the past five years are in Florida (p. 21). All five have impact fees that dwarf those proposed for Fayetteville, which ranked No. 2 on the same list in job growth.
The impact fee on a single-family dwelling in Lakeland, Fla., is more than $17,000. In Bradenton, Fla., the cost per 1,000 SF of retail space is $6,466. For Fayetteville, those proposed fees are $4,967 and $2,701, respectively.
In September, Fayetteville citizens approved a sales tax increase and a tax extension to fund bonds totaling $65.9 million for road improvements, but a number of lower-priority projects went unfunded and the city still holds a list of $82 million worth of roadway renovations.
So while widening Crossover Road from Mission Boulevard to the northern city limits has been funded through a 0.25-cent sales tax increase, projects like expanding Mall Avenue to three lanes or Drake Street to five from Garland Ave. to Interstate 540 have been put on the backburner.
City officials have said more than once that road impact fees could be used to pay down that debt faster, but city Finance Director Paul Becker has clarified the city’s position and said Fayetteville couldn’t legally use impact fees to pay off bonds.
The impact fees can only be used to pay for projects not funded by the bond issue, Becker said, such as $9 million for the planned beautification of College Avenue or another $10.2 million to extend Old Wire Road.
Fayetteville’s roadway system now has more than twice the capacity for its current usage.
With road impact fees projected to bring in more than $4 million per year, the city could pay for its unfunded projects and implement its 2025 Master Street Plan without raising taxes further.
No projects can begin until the impact fees are collected, and the funds must be placed in a separate interest-bearing account. They cannot be used for street maintenance and if they aren’t used within a set time — usually five to eight years — they must be refunded to the payer.
If there were a slowdown in development — and therefore less revenue from impact fees — the city would have a corresponding lesser need for capacity-expanding improvements.
Fayetteville has passed several ordinances in recent years which have been seen as unfriendly to development such as tree preservation, the overlay district around I-540, signage restrictions and limits on building size.
None of those have slowed the city’s growth, said City Planning and Development Management Director Tim Conklin.
“Every time we try to manage our growth in Fayetteville with a new policy or regulation, we continue to see development occur,” he said.
Fee History
Impact fees are nothing new nationally or in Northwest Arkansas.
Impact fees first began in Florida in the mid-1980s as a response to the taxpayer revolts of the 1970s over ever-increasing property taxes to fund growth-related infrastructure improvements such as roads, parks and schools.
Since then, more than half the states, including Arkansas, have passed some form of enabling legislation to allow municipalities to charge fees for consumption-based impact.
Fayetteville has had wastewater/sewer impact fees since 2001 and it currently costs $1,143 for a single-family residence and $183 per 1,000 SF for a retail space. A new fee study is currently under way and developers expect the impact fee for water hookups could double before the end of the year.
Bentonville charges impact fees for water, sewer and fire service. The total for a single-family dwelling is $3,598. It is $1,081 per 1,000 SF of office space.
Springdale and Rogers do not have impact fees.
In Melbourne, Fla. — roughly comparable to Fayetteville in population, median income and job growth — residents pay $6,838 in impact fees for a new home and businesses pay $4,040 per 1,000 SF for retail space.
Most counties and cities in Florida have some sort of impact fee.
“I don’t think we saw any building slowdown with adoption of impact fees,” said Melbourne deputy city manager Howard Rolls.
“Florida is a place people want to live and work and play and that’s part of the cost of having the facilities to support the homes and businesses.”
On an Island
Unlike Florida, developers will be able to avoid paying impact fees in Northwest Arkansas simply by not building in Fayetteville. Rogers and Springdale have long had a more business-friendly approach than Fayetteville, and Israel predicts Rogers’ expansionist approach will make it “the dominant city in Northwest Arkansas” thanks to a growing sales tax base fueled by projects like the Pinnacle Promenade and the John Q. Hammons Center.
A 200-room hotel could locate in Johnson rather than pay $600,000 to $800,000 in impact fees in Fayetteville. Fayetteville would also lose out on the hotel and restaurant tax revenue.
Developers have absorbed the water impact fees into their budgets in the past but will not be able to with road impact fees. While they agree with the measurable costs of a sewer hookup, they dispute the numbers used to calculate the capacity increases needed for a new office building or a subdivision.
Israel points to his new building, which satisfies Fayetteville city desires for in-fill projects rather than sprawl, and the fact that it will be occupied by businesses already located in Fayetteville, not new ones.
“I’m not putting any more cars on the road and there really isn’t any road improvement necessary,” Israel said.
The numbers used by Duncan and Associates to calculate average daily vehicle trips generated by a new home or retail space are very conservative, Conklin said. Impact fee ordinances have often been met with developer lawsuits, so making their formulas legally defensible is a must for any consulting firm.
Further, the city’s street committee compromised with developers and lowered the recommended impact fees by about a third, which means the impact fees actually do not cover the true cost of replacing the capacity consumed by a new development on the desired 1-to-1 ratio.
“As you consume capacity, what is the cost to replace capacity?” Conklin said. “It’s very well-established data. You’re going to create X-number of travel when you add a house or 1,000 SF of commercial or retail use.”
Broyles, who is developing a 385-unit mixed-use project called Woodstock on Wedington Drive, said the impact fees for the project would total at least $2.3 million.
He is preparing for his future residents to have three options for paying their impact fee. They can pay a monthly fee to a property owners association, include the impact fee in their mortgage cost and finance it or write a check to cover it when they close the sale.
He said while the city has pitched the impact fees as a cost borne by newcomers to the area, some realtors he’s spoken with have said as many as 40 percent of the houses sold in Fayetteville are to current residents.
“That theory of shifting impact fees on to new people moving really doesn’t hold water,” Broyles said.
Looking Ahead
Over time, studies have shown developers will find ways to deal with impact fees.
For one, impact fees have been shown to increase the supply of buildable land through the infrastructure improvements they fund.
In Northwest Arkansas, where land prices have already pushed lease rates to a near breaking point, lower land prices from impact fees could stabilize rents.
One thing is for certain, though. Fayetteville has always taken a unique approach to growth and the possible loss of business has yet to overcome a desire by many to preserve a small-town atmosphere in one of the nation’s fastest-growing metropolitan areas.
“People in Fayetteville are very passionate about the quality of life here,” Conklin said. “They love this community and they want us to do things to manage growth in the community.
“More roadway capacity will allow development to continue. It will reduce congestion and the time it takes people to get to work and school. That will reduce gas consumption. There are a lot of reasons to improve transportation.
“Keeping up with roads keeps us competitive and preserves the quality of life people have come to expect in Fayetteville.”