November 8, 2021 by Lisa Pool
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Cities, counties, and towns that plan under the Growth Management Act (GMA) are authorized to collect impact fees on new development per RCW 82.02.050. Impact fees are one-time charges assessed by local governments to help finance public facilities (e.g., schools, parks, and road improvements) that will serve the new development.
Impact fees are collected from applicants when the building permit is issued. Applicants that do not defer impact fees typically finance them with a construction loan or pay them out of pocket. If applicants finance the fees, they must pay interest on the loan until the property is sold. Deferring impact fees allows applicants to delay paying impact fees upfront, which can save money by reducing finance costs.
A September 2021 report from the Washington Joint Legislative Audit and Review Committee (JLARC) provides an analysis of the use and effectiveness of impact fee deferral programs. The report covers two main requirements:
- The 2015 requirement (ESB 5923) for counties, cities, and towns that collect impact fees for new single-family residential construction to adopt a fee deferral process, which allows applicants to pay impact fees near the end of the construction process rather than at the beginning; and
- The requirement for JLARC to collect data on the use and cost of impact fee deferral programs and to review implementation of these deferrals.
This blog will highlight key takeaways from this preliminary JLARC report.
Key Findings
The JLARC report includes four key findings: 1) impact fee deferral programs vary, 2) deferral use has been infrequent and concentrated among five local governments, 3) 99.9% of deferred fees were repaid on time, and 4) several factors influence the decision to defer impact fees. More information on these findings is included below.
Impact fee deferral programs vary, as allowed by state law
JLARC staff identified 107 local governments that collect impact fees and are required to have deferral programs. Of those, 98 implemented deferral programs and nine did not. The law allows local governments to decide when to collect deferred impact fees, whether to impose a reasonable administrative fee, and whether to limit deferral to the first 20 building permits per applicant per year. Local governments implemented programs using different combinations of these three factors and, as a result, deferral programs vary among them. Additionally, administrative fees of the 60 local governments that charge them range from $50 to $1,200 per single-family home, with a median fee of $200.
Deferral use has been infrequent and concentrated in five local governments
Applicants requested and received 3,741 deferrals from 22 of the 98 local governments that offered them. Five local governments — Redmond, La Center, Ridgefield, Ferndale, and Kitsap County — issued 91% of all deferrals. These deferral programs have several elements in common, including not requiring a lien and not charging administrative fees.
Data indicates that deferral use has been infrequent and unrelated to permit activity. Applicants requested deferrals on 1,284 permits, which is less than 5% of the permits issued for single-family homes by the 98 local governments with deferral programs. In addition, of the five jurisdictions that issued the most single-family building permits, only one issued any deferrals. The five local governments that issued the most deferrals issued only 8% of single-family building permits.
Local governments report 99.9% of deferred fees were repaid on time
Jurisdictions reported few issues with unpaid deferrals. In 2018 and 2019 applicants deferred $11 million out of $323 million in impact fees. All but $13,000 was repaid on time. By law, local governments must require applicants to record a lien against the property in the amount of the deferred impact fees. Jurisdictions reported that the lien requirement was intended to protect their interests but may be problematic or unnecessary, as it may discourage applicants from pursuing deferrals. They also noted that other controls, such as withholding final inspection, are at their disposal.
The five local governments with the most deferrals do not require liens primarily because those jurisdictions that established programs before the 2015 legislation are exempt from this requirement.
Builders said several factors influence their decision to defer impact fees
JLARC staff modeled the financial benefit of deferring fees in the 98 local governments with deferral programs. The model indicated that deferrals offer greater savings to applicants if impact fee amounts and interest rates are high and deferral periods are long. In today’s housing market, however, interest rates are low and deferral periods are short. As a result, models estimate current cost savings of no more than $1,500 per single-family residence. However, builders and other stakeholders report that impact fee deferrals may be a valuable tool in the future, particularly if interest rates increase and houses do not sell as quickly.
In addition to the above findings, it was noted that statute requires the Washington State Department of Commerce (Commerce) to report the number of deferrals requested, issued, and not paid. JLARC observed that Commerce will need to collect information not currently required by statute if the Washington State Legislature requires information about whether deferral use and costs change in the future. Since deferrals are not currently widely used and there have been few issues for local governments, ongoing monitoring may be unnecessary.
Recommendations
In this preliminary report, the Legislative Auditor made three recommendations to improve efficiency and accountability of impact fee deferral programs:
- Cities without an existing deferral program should pass an ordinance to adopt and maintain an impact fee deferral program for single-family residential construction as required by statute.
- The legislature should consider whether liens are a necessary tool to ensure that deferred fees are paid.
- The legislature should either repeal Commerce’s data collection requirement or identify which measures the agency should collect for ongoing program oversight.
MRSC’s Impact Fees webpage includes examples of code provisions and deferral forms. In 2018, Thurston County adopted Ordinance No. 15340 regarding deferral of impact fees for attached and detached single-family residential construction.
Conclusion
Local government staff should review the full JLARC report and its methodology in greater detail to better understand the issues and potential improvements related to impact fee deferral programs. Responses from agencies on the latest status of implementing recommendations from this report are anticipated next year.
MRSC is a private nonprofit organization serving local governments in Washington State. Eligible government agencies in Washington State may use our free, one-on-one Ask MRSC service to get answers to legal, policy, or financial questions.
About Lisa Pool
Lisa Pool joined MRSC in June 2021. Most recently, she served as a senior planner for Bellingham. In this role, she primarily focused on long-range planning projects, including the city’s comprehensive plan and new housing-related regulations. Prior to moving to Bellingham, she worked on regional sustainability and transportation issues for a metropolitan planning organization and conducted development review for cities and counties in the Midwest.
Lisa holds a Bachelor of Arts in environmental policy and a Master of Urban Planning, both from the University of Kansas in Lawrence. She has been a member of the American Institute of Certified Planners since 2009.
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