INSIGHT: Impact Fees—The Substantial Burden of Substantial Reliance

Impact fees imposed on a commercial real estate development are a significant line item in the proforma budget and carry risk due to uncertainties surrounding their imposition and increase. When a municipality imposes new or increased impact fees mid-project, a developer can be left with a substantial budget impact if unable to push the costs to the end user. Recently, impact fees have become more prevalent as cities attempt to offset the increased costs of public services and infrastructure needs generated by new development. There is little consistency, even within states, as to when a municipality can assess new fees during development, but there are emerging trends that can help inform a would-be developer.

An important consideration is how and whether a municipality is required to give notice prior to implementing an impact fee increase. Impact fees are generally governed by a state’s enabling statute. Many states do not require a local government to provide explicit notice of impact fee increases. As a practical matter, this means that a development project could see per unit impact fees increase from $0 to $50, $500, or even $5,000, with effectively no notice.

For example, the Pennsylvania enabling statute assesses impact fees as of the date of preliminary land development approval, but new impact fee ordinances enacted during the pendency of a preliminary land development application may allow the new fee to apply retroactively for a period of up to 18 months. Further, the Pennsylvania statute does not require the municipality to publish notice of its intent to adopt an impact fee ordinance.

Indeed, only five states (Arizona, California, Florida, Utah, and West Virginia) impose a waiting period between the date an impact fee ordinance is passed and the date the fee goes into effect and even then, the required waiting periods are typically less than 90 days. Notably, effective July 1, 2020, Florida joined California by statutorily prohibiting the imposition of impact fees enacted or increased during any waiting period from applying to certain development applications submitted during such period.

When not addressed by statute, a developer’s rights with respect to changes in zoning and land use regulations have typically been reviewed by courts under a vested rights analysis to determine the point at which a developer has taken substantial steps towards completing a project such that imposing new or additional obligations would be inequitable. Few courts, however, have analyzed vested rights with respect to new or increased impact fees. Those that have taken up the issue agree that a developer must “substantially” rely on prior impact fee ordinances before the right to pay the prior fee amounts are protected as vested rights. The highly fact-specific nature of many vested rights claims make it difficult to parse out which development activities rise to the level of substantial reliance. Nevertheless, a review of the activities that courts identify as falling below the substantial reliance threshold provides some insight:

Multi-phased developments are subject to mid-phase impact fee adjustments.

A developer might assume that approval of one phase in a multi-phased development is sufficient to vest its rights with respect to impact fees. However, courts have held that impact fee ordinances enacted between development phases may be assessed against subsequent phases. This is the case even when there is no significant lag between the construction of different phases of the development. Developers can attempt to preempt impact fees imposed between development phases by negotiating a development agreement with a municipality outlining the costs and fees associated with the entire development.

Presale of property does not vest rights.

Presales of units within a development mitigates some risk, can be used as a financing tool and generates funds necessary to begin construction. However, the presale of units, even those whose price does not account for an increase in impact fees, has been held insufficient to vest a developer’s rights. While structuring around this issue via the purchase contract or construction contract is possible, if not specifically addressed, the developer may have to assume the unanticipated cost.

Developers cannot rely on building permits alone.

A majority of states assess impact fees at the time a building permit is issued. In states that assess impact fees after issuing a building permit, courts have held that the receipt of building permits does not vest a developer’s rights with respect to the payment of impact fees. In Russ Building Partnership v. City and County of San Francisco, a developer received permits to construct an office building in San Francisco. After construction began, San Francisco adopted an ordinance imposing a transit impact fee as a prerequisite to obtaining a certificate of occupancy.

The California Supreme Court held that the newly adopted impact fee could be assessed against the developer. In states that allow a developer to choose whether to pay impact fees at the time of the building permit or upon receipt of a certificate of occupancy, a developer would be wise to consider paying the fee at the time of receipt of its building permits in an attempt to establish substantial reliance and insulate itself from future fee increases.

Statutory vested rights do not always apply to impact fees.

Some states have addressed the uncertainty surrounding vested rights by codifying the point at which a developer’s rights vest. By way of example, the State of Washington, which has some of the most robust legislation governing vested rights, statutorily vests “zoning or other land use control ordinances” upon submission of a complete preliminary plat application. Meanwhile, the state’s impact fee enabling statute is housed under the excise tax title of Washington Statutes. Washington courts have consistently held that codifying impact fees among Washington’s tax statues indicates that impact fees are not land use control ordinances and therefore are not subject to vested rights protection. The good news for developers is that a majority of states statutorily authorizing impact fees have codified the fees under their land use statutes.

Impact fees construed as taxes apply retroactively.

Not every state allows a municipal government to unilaterally impose taxes. States that do grant local governments such taxing authority have tended to uphold the retroactive application of impact fees as a permissible exercise of the governments taxing authority. Developers in states with enabling statutes that allow the imposition of taxes should be especially cautious when a new or increased impact fee is proposed, as the impact fee may not be protected as a vested right.

Final thoughts and recommendations.

The case law guiding the imposition of mid-project impact fees is vague at best. Still, it is clear that a developer bears the burden of demonstrating its substantial reliance on prior impact fees ordinances. Prudent developers should consider other ways to tie down impact fees, such as through negotiated development agreements with the governing municipality and staying abreast of pending changes to or political discussion surrounding local impact fee ordinances. Lastly, utilizing experienced and well-connected counsel early in the diligence and development process can often add value that exceeds the cost.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Samantha Decker is an attorney in the Tampa office of Squire Patton Boggs. Her practice focuses on commercial real estate transactions.