Alert July 16, 2010

Court Upholds Impact Fees, But Not for General Revenue

Impact fees, as the name suggests, are intended to help pay municipal costs that arise as an impact of development. The precise relationship between impact fees and those costs, however, has long been debated. In California, the appellate court recently addressed this issue in the case Homebuilders Association of Tulare/Kings Counties, Inc. v. City of Lemoore, 2010 Cal. App. LEXIS 859 (Cal. Ct. App. 2010).

In the City of Lemoore case, the local building association challenged several impact fees imposed by the City for various purposes, including parks and recreation, police, public safety, municipal facilities, solid waste and fire protection. The court upheld all of the fees except certain of the fire protection fees. Unlike the other fees, the fire protection fees assessed on property located in the City’s east side were being levied on property that already had been substantially developed, and to reimburse the City for facilities that already had been constructed. The court held that such fees had been imposed for general revenue purposes, and were therefore invalid.

Notwithstanding the invalid fire protection fees, this case otherwise reinforces the validity of impact fees as a method by which California municipalities can compel developers to help finance certain infrastructure associated with a development. For larger projects, developers can sometimes negotiate a more favorable financing structure, utilizing public financing tools such as development agreements, tax sharing agreements and special assessment districts or Mello-Roos community facilities districts. Nevertheless, impact fees continue to increase in popularity in California and across the nation and represent a critical consideration when assembling a development financing package.