Urban land prices rise rather than fall in response to imposition of development impact fees due to one of two reasons. First, impact fees imply a contract for development that is worth more as a package than no fees and uncertain development. Impact fees are actuallythe final stage of a policy process that anticipates development pressures through a land use and facility planning scheme. In return for paying fees, developers are assured of adequate facilities. Impact fees thus enable the urban land market to internalize otherwise unpriced development externalities such as greater certainty in approval, extension of needed facilities, and reduced political oppositionbecause developers are paying their own way. Second, if impact fee policy is part and parcel of an overall growth restriction effort, development production will fall in the near term because of higher construction costs represented by the fees. In the near term, developers either find ways to reduce development costs, perhaps through greater land use intensity or lower quality, or they take fewer profits. To avoid lower profits in the longer term, developers leave the market only to return when the post-fee profit margins equal pre-fee levels. Those levels are attained when prices rise just enough to offset the fees. Land owners in the urban land market respond to higher development prices by raising land prices if the land-to-development price ratios remain substantially unchanged. The central hypothesis--that urban land prices will rise in response to imposition of development impact fees--was applied to evaluations of the urban land markets in loveland, colorado, and sarasota county, florida. Evidence was found that supports the hypothesis, but the reasons are not yet clear. Although additional study is needed, the findings break newground in an understanding of how urban land markets respond to development impact fees. This paper appears in transportation research record no. 1305, Finance, planning, programming, economic analysis, and land development 1991.
Abstract