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Transportation Funding & Financing

Development Exactions

Broadly speaking, a development exaction can be any requirement placed on a developer as a condition of receiving municipal approval. They can be in the form of a fee; the dedication of public land, habitat, or right-of-way; the construction or maintenance of public facilities or infrastructure; or the provision of public services. They have been traditional sources of financing onsite public facilities, such as local roads, sidewalks, streetlights, and local water and sewer lines, and are often viewed as an alternative to property taxes for these facilities.

In cases where proposed developments are too small to individually dedicate land or facilities of meaningful magnitude, some municipalities require in-lieu fees or impact fees. These fees are generally one-time cash payments and are used to fund the incremental cost of new infrastructure, such as sewers, parks, libraries, schools, roads, transit, and general government facilities. The developer of a proposed project pays the impact fee, although the developer will, as a practical matter, pass the costs of these fees on to the purchasers of the developed property where possible. The local government examines the proposed development, identifies what facilities are needed to sustain the desired level of service, and charges the developer a fee to cover a portion of the cost of the needed improvements.

Many areas that have relied heavily on exactions and negotiated agreements have institutionalized and evolved them into a more formal system of development or, in the specific case, traffic impact fees. Traffic impact fees can be used for large-scale centralized facilities, such as arterial roads and sewage treatment plants, as well as for small-scale facilities. Under fee systems, each development contributes to the financing of public facilities that serve it and liabilities are known in advance. Depending on the state, special enabling legislation may be required to impose an impact fee. These impact fees can also be predicted in advance to issue bonds to finance the infrastructure improvements.

In some cases, particularly when a planned development is very large and will be constructed over many years, a developer and local municipal government will enter into a development agreement. Development agreements usually involve the negotiated dedication of land and facilities by developers, with a formal agreement or contract. The use of development agreements is generally limited to the financing of facilities whose need is clearly identified with the new development making the contribution. In most cases, such agreements are negotiated and imposed only on large-scale developments, and they may include such improvements as deceleration lanes, left-turn lanes, road widening, signalization, and, in a few cases, freeway overpasses and interchanges.

Mello-Roos Community Facilities Districts

Mello-Roos Community Facilities Districts are a special kind of taxing district used in California. The districts are established through the state's Mello-Roos Community Facilities Act of 1982, which allows residents or landowners in an affected community to initiate a special tax-backed bond issue by a two-thirds majority of registered voters within a specific geographical area.

The law may also be used by developers who agree to sell bonds to pay for infrastructure improvements and pass on the annual assessment to the eventual homebuyers. Before the sale of a subdivision, the developers are the only "voters" in the district. Mello-Roos bonds are tax-exempt, secured by the property in the community in which they are employed, and are paid over a long term, usually 20 to 25 years. The fees assessed on property owners may increase on an annual basis. By establishing a Mello-Roos district, developers may be able to sell homes at a lower price by using the bonds to finance infrastructure with monthly or annual payments made by the future homeowners.

Overall, the Act provides a way for a community to raise funds for improvements to infrastructure (schools, parks, sewers, roads, etc.) and community services even though California's Proposition 13 has limited local governments' ability to tax property since its passage in 1978.


Development Exaction Legislation

Impact Fees - National Association of Home Builders
National Impact Fee Roundtable
Transportation Impact Fees - Municipal Research and Services Center of Washington - Duncan Associates
What is Mello-Roos? - California Tax Data