No. 93 – Effects of Impact Fees on the Suburban Chicago Housing Market

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Municipalities in suburban Chicago impose fees ranging from $2,223 to $8,942 on new four-bedroom homes. Other “unofficial” fees and the cost of complying with regulations add significantly to these totals. Impact fees are passed through to new home buyers in the form of higher prices or reduced choice of size, location, and amenities. Due to the incentives facing policymakers and the lack of accurate information on the true cost of new development, impact fees are unlikely to reflect the true cost of public services or infrastructure. High impact fees are regressive, reduce the supply of moderately priced housing and may negatively affect a community’s ability to attract and retain good-paying jobs.

1. Impact fees in suburban Chicago range from $2,223 to $8,942 for a typical four-bedroom house.

Impact fees are charges collected by counties and municipalities from developers to recover the cost of infrastructure improvements attributable to new development. Impact fees are an increasingly common tool that municipalities around the country use to pay for new schools, sewers, roads, parks, and other public amenities.

For the present study, the authors calculated the fees on a four-bedroom, single-family home on a 1/4-acre lot for eight suburban Chicago communities between 1995 and 1997. The totals range from $2,223 in Aurora to $8,942 in Burr Ridge.

2. Municipalities impose other costs on developers that add significantly to the price of new homes.

As large as they sometimes are, official impact fee schedules dramatically understate the true costs imposed on developers by municipalities. Other costs include annexation fees, permit and application fees, connection fees, time spent in public hearings, interest paid on loans or capital investments pending approval of applications, and the cost of complying with many other kinds of regulations. Many expenses are unique to each project and therefore cannot be averaged.

One case study of a 33-home development in Naperville, Illinois reveals actual charges incurred by the developer totaling $343,917, or $10,421 per house, more than twice the “official” amount of impact fees. That same developer estimates that he spent $228,329 more to hire civil engineers, do environmental and archeological studies, and pay legal fees and interest due to process delays and land planning design costs. Regulatory delays of three and four years are documented by the case studies.

Impact fees are commonly defended on economic efficiency grounds as a way to compel new homebuyers to pay the marginal costs of their impact on local infrastructure. But impact fees are not set at levels to collect the “right” amount of revenue for three reasons:

• The true “cost of development” is difficult to calculate due to the enormous complexity and uncertainty of future residents’ use of schools, roads, parks, and other public facilities. Exhaustive studies of the matter have come to very different conclusions.

• The ambiguity of the test creates a rent-seeking opportunity for municipal governments: government officials may, in other words, charge developers more than the real cost of development simply to increase the municipality’s treasury.

• Current homeowners have a financial incentive to support municipal policies that set impact fees too high. Sellers of existing homes enjoy a windfall profit when high impact fees are imposed on new homes, since their homes are close substitutes for new homes. Homeowners who do not sell their homes enjoy improved creditworthiness due to the increased value of their homes.

Of the communities examined for this study, only one devotes significant attention to estimating the future income stream represented by property taxes from new homes. Much more common is the case of Naperville, where an almost random application of fees and fines appears designed to maximize municipal revenue rather than recover investments in infrastructure.

4. There is no such thing as a free lunch: Somebody has to pay impact fees.

When municipalities adopt impact fees, all other things being equal, developers will be willing to sell less housing at any given price, since they now must recover their cost of producing the housing as well as the cost of the fee. This means higher prices for housing in the community charging the fees, or changes in the type and location of new housing. Empirical analysis performed for this study found that impact fees significantly raised the prices of new homes. The increase for an average new four-bedroom home ranged from $2,148 in Bolingbrook to $10,943 in Burr Ridge.

Where developers are unable to pass along fees to homebuyers directly, they may choose instead to build in areas with lower fees even though such areas are less suited to commuting patterns and community planning, or they may build larger and more expensive homes to recover the fees through higher margins. These activities impose indirect, but still significant, costs on taxpayers, commuters, and homeowners.

5. High impact fees are regressive and lead to less moderately priced housing.

People with modest incomes are hurt by impact fees in two ways. A community’s impact fees are typically the same whether a new home is priced at $150,000 or $500,000. The fee therefore requires a larger percentage increase in the sale price of lower-priced homes than of higher-priced homes.

Second, builders are most likely to respond to high impact fees by reducing the supply of moderately priced housing, since fees are usually added to the cost of the lots they build on, and the size and amenities of new homes are often chosen to justify a sales price of between three and four times the cost of the lot.

Because impact fees significantly increase new housing prices in suburban Chicago, they prevent some potential homebuyers from purchasing homes. Those who can still afford to buy a home are forced to buy less housing than they otherwise could have. To the extent that income is correlated with race, impact fees may slow or prevent the migration of minorities into the suburbs.

High housing costs in the Chicago area are a legitimate concern to housing advocates and cost-conscious businesspeople. According to a recent survey, the same 2,000 square foot home with 3-4 bedrooms costs $175,000 in the Chicago metropolitan area, $110,000 in Jacksonville, Florida, and $160,000 in Seattle, Washington.

Impact fees raise serious questions of fairness. They force newcomers to pay more, sometimes much more, for the same services and amenities enjoyed by current residents. Younger families are deprived of the lifestyle enjoyed by older people, even though the former are willing to pay the full cost of their impact on the community.

As high impact fees on new development push up the prices of existing homes, some long-time residents may encounter difficulties paying the higher taxes that accompany higher assessed valuations. They may be wealthier in terms of their assets, but they may not wish to sell their homes and leave the neighborhoods in which their friends and relatives continue to reside.

High impact fees may reduce job creation and personal income growth. Employers risk losing high-quality workers to areas with more moderately priced housing or, if they raise salaries to compensate for the high prices, risk losing sales to lower-priced products offered by competitors. Some employers will simply relocate to a community with lower housing costs.

Impact fees are not a “free lunch” for municipalities. They raise the prices of new homes and encourage construction of more expensive housing in less-optimal places. Case studies indicate that fees, exactions, construction delays, and regulatory compliance costs impose sizeable additional costs on developers. All of these costs are eventually passed along to consumers either directly, through higher home prices, or indirectly, through imposed social costs.

Setting impact fees at the appropriate levels requires considerable research into the accounting and budgetary structure of a municipality. Institutional incentives lead municipalities to set fees higher than would be justified by such research. Frequent changes to fee structures and ad hoc assessments and exactions imposed on a project-by-project basis increase building costs without generating any offsetting revenues or benefits for municipalities.

For all these reasons, municipal officials should pay careful attention to the unintended economic and social consequences created by their use of impact fees.

Based on Heartland Policy Study #93, “Effects of Impact Fees on the Suburban Chicago Housing Market,” by Brett M. Baden, Don L. Coursey, and Jeannine M. Kannegiesser. Printed copies are available from The Heartland Institute for $10 each. You can also download the full text, free of charge, in Adobe’s PDF format; click here for the Policy Study and here for the Appendices.

Copyright 1999 The Heartland Institute. Nothing in this Executive Summary should be construed as reflecting the views of The Heartland Institute, nor as an attempt to aid or hinder the passage of any legislation. Permission is hereby given to reprint or quote from this Executive Summary; please send tearsheets to The Heartland Institute, 19 South LaSalle Street, Suite 903, Chicago, Illinois 60603.

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