Municipalities across the country are grappling with the challenge of funding infrastructure to support growth, from roads and schools to utilities and parks. Impact fees — charges imposed on new developments to offset these costs — have become a preferred tool for local governments.

However, their application often has far-reaching consequences that undermine broader community goals.

The situation is further complicated by the current economic environment. Rising interest rates have increased borrowing costs for developers, while higher material and labor costs have further strained budgets. In this context, the imposition of impact fees creates an additional financial burden that limits development, stifles economic growth, and deepens housing affordability crises.

Impact on Affordable Housing

Rising Development Costs

Affordable housing has long been a critical issue in many regions, and impact fees are a significant contributor to the problem. These fees, which can range from $5,000 to $50,000 or more per unit, dramatically increase the cost of development. Developers facing these costs often pass them on to buyers or renters, resulting in higher home prices and rental rates.

When paired with rising interest rates, the financial equation becomes even more challenging. Higher mortgage rates reduce the purchasing power of prospective homebuyers, leaving fewer people able to afford homes. For renters, developers of multifamily housing face higher financing costs, leading to increased rents to maintain profitability.

Shift Toward Luxury Developments

Faced with the dual pressures of impact fees and higher borrowing costs, many developers abandon affordable housing projects in favor of high-margin luxury developments. These projects, which offer greater returns on investment, are better suited to absorb the costs imposed by municipalities and financial institutions. However, this trend leaves low- and moderate-income households with limited options, further exacerbating housing shortages and deepening socioeconomic divides.

Reduced Supply Flexibility

Speculative housing construction, which helps meet market demand quickly, is particularly vulnerable to these challenges. Builders of spec homes must anticipate future demand and carry significant financial risks during construction. When impact fees and rising interest rates increase upfront costs, many developers are deterred from pursuing these projects. This results in a supply bottleneck, where housing availability fails to keep pace with demand, driving up prices and reducing market accessibility.

Impact on Local Businesses

Barriers to Entry for Small Businesses

Impact fees also affect commercial development, creating significant challenges for local businesses. Small businesses, which often operate on tight margins, are particularly sensitive to these costs. For instance, a small retailer or restaurant looking to open a new location may find the additional expense of impact fees prohibitive. As a result, many entrepreneurs delay or abandon expansion plans, stalling economic growth and reducing community vibrancy.

Deterrence of Large-Scale Investments

Larger businesses, while better equipped to absorb the costs of impact fees, also reconsider their investments in areas with high fees. Companies seeking to establish operations or expand into new markets often evaluate the financial landscape, including the regulatory and fee structures of potential locations. High impact fees, coupled with rising interest rates, make some municipalities less attractive, diverting investment and economic activity to other regions.

Long-Term Economic Consequences

Fewer businesses mean fewer job opportunities, reduced local tax revenues, and less economic dynamism. Over time, municipalities that rely heavily on impact fees risk developing reputations as anti-business environments, further discouraging investment and economic diversification.

Impact on Job Growth

Construction Industry Challenges

The construction industry, a cornerstone of local economies, is among the hardest hit by the combination of impact fees and rising development costs. Builders face higher borrowing costs due to increased interest rates, compounded by the significant upfront expenses imposed by municipalities. This leads to delays or cancellations of projects, directly reducing employment opportunities for contractors, laborers, architects, and suppliers.

Ripple Effects Across Industries

The slowdown in construction activity has broader implications for job growth. Fewer commercial developments mean fewer employment opportunities in retail, hospitality, and professional services. This reduction in job creation disproportionately affects working-class individuals and exacerbates economic inequality within communities.

Economic Stagnation

The cumulative effect of these challenges is economic stagnation. Municipalities relying on impact fees inadvertently create a cycle of reduced development, fewer jobs, and slower growth, which further diminishes their appeal as places to live, work, and invest.

Cost vs. Risk for Builders

The Unique Challenges of Spec Homes

Speculative homes play a critical role in addressing housing demand, particularly in growing communities. However, the financial risks associated with these projects are amplified by impact fees and rising interest rates. Builders must invest significant capital upfront, often relying on loans to finance construction.

When borrowing costs rise, so does the overall expense of development, eroding profit margins and deterring investment.

For example, a $30,000 impact fee on a spec home might represent a significant portion of the developer’s expected return. Combined with elevated financing costs, this burden makes many projects financially unfeasible, particularly for smaller builders who lack the resources of larger firms.

Market Bottlenecks and Affordability

The reduction in spec home construction creates supply bottlenecks that drive up housing costs. Limited availability of homes leaves prospective buyers with fewer options, exacerbating affordability challenges. This lack of flexibility in the housing market disproportionately affects middle- and lower-income households, further widening the gap between housing supply and demand.

Local Impact

Recent data underscores the severity of the situation: subdivision applications in Grand Junction, Colorado, have plummeted by 70%, all the while the city is currently conducting a third-party study to potentially increase impact fees. This reflects a troubling disconnect between municipal policies and the broader economic realities faced by developers and communities.

Now may not be the time to make development even less affordable, as these combined pressures could deter essential housing and business projects that the community urgently needs.

Kelly Maves is vice president of Maves Construction and a licensed Realtor with more than 20 years of construction, development and real estate experience. She is a board member of the Colorado Association of Home Builders and the Housing and Building Association of Western Colorado.