Impact Fees

Impact fees are a tool used by local municipalities to help fund infrastructure needed to support future development. In basic principle, when developing a new community, a city may already have in place a cost per unit that a developer must pay in addition to all other development costs and fees. This additional cost is intended to help fund local infrastructure improvements that, in theory, will better support the development and surrounding community in the future.

The purpose behind impact fees is that new development creates additional demand on infrastructure such as roads, water systems, sewer capacity, and other public facilities. As a result, local governments argue that new development should contribute toward those future costs rather than placing the burden solely on existing taxpayers. Examples of infrastructure commonly funded through impact fees include roads, water systems, sewer systems, parks, and public safety facilities. Impact fee structures vary significantly across Indiana municipalities, with fees ranging from approximately $1,000 per unit to more than $12,000 per unit depending on the community.

How Municipalities Establish Impact Fees

A municipality must establish an Impact Fee Advisory Committee before adopting an impact fee ordinance. This committee is appointed by the executive of the unit (typically the mayor) and must consist of at least five and no more than ten members. State law requires representation from the single-family housing industry, multifamily housing industry, and the real estate profession, with those members selected based upon recommendations from the statewide trade associations representing each industry.

The committee serves in an advisory capacity and assists the municipality in reviewing and implementing impact fee proposals under IC 36-7-4-1311. While the committee does not directly establish the fees, it plays an important role in evaluating how impact fees may affect development within the community.

Restrictions in Calculating Impact Fee’s

Because impact fees can vary significantly from one municipality to another, state law places several limitations on how local governments may establish and calculate impact fees. One of the primary concerns with impact fees is ensuring that new development is only charged for infrastructure that directly benefits the development paying the fee. To address this concern, IAA and other housing stakeholders successfully advocated for additional guardrails in HEA 1001-2026.

Under the newly revised law, an impact zone must include only the geographical area necessary to ensure that:

• • There is a functional relationship between the infrastructure and the development paying the fee;
  • The infrastructure provides a reasonably uniform benefit throughout the impact zone;
  • All areas within the impact zone are contiguous; and
  • The impact zone is either contiguous to the new development, coterminous with a utility service or distribution line necessary to serve the development or located no more than five miles from infrastructure improvements defined by statute.

These restrictions were intended to ensure that impact fees remain connected to the actual infrastructure needs created by development and prevent fees from being used to fund unrelated projects elsewhere in the community.