What is an impact fee in real estate development?

An impact fee in real estate development is a charge imposed by local governments to cover the costs associated with providing public services that are necessitated by new development. This can include expenses related to infrastructure improvements such as roads, schools, parks, and water supply systems. The rationale behind impact fees is that new developments increase demand for public services, and therefore, the developers should contribute financially to ensure that those services are adequately funded and maintained.

This approach allows municipalities to manage growth and urban development sustainably while ensuring that existing residents do not bear the additional financial burden of costs incurred by new developments. The fees are typically calculated based on the expected impact of the development on public services, which ties the cost directly to the level of service required.

Other options describe different financial mechanisms related to development but do not accurately capture the definition of an impact fee in the context of local government funding for public services. For instance, while environmental assessments can incur fees, these are specific to the review process and not indicative of broader public service costs. Similarly, a tax based on development size does not specifically relate to the impact a development has on local infrastructure or services, and penalties for non-compliance with zoning laws address regulatory issues rather than funding public needs arising from new growth.