Impact Fees Suffer Another Setback…Is it Good for Developers?

A series of recent lawsuits that have resulted in the North Carolina Court of Appeals and North Carolina Supreme Court limiting the ability of municipalities to assess impact fees as a part of  a zoning ordinance.  Impact fees are assessments upon the owners or developers of land made by local governments to recoup some or all of the capital costs of public facilities needed to serve new developments. Impact fees, rather than general tax revenues, are regularly used to finance new roads, utilities, parks, schools, and other public facilities (such as city buildings, fire and police stations) that must be provided to service new development. Many states allow the use of impact fees, and while local governments in North Carolina have the authority to impose fees for a variety of “public enterprise” functions, such as the provision of water and sewer services, this is not a license to charge impact fees to fund all infrastructure deficiencies. Zoning and subdivision statutes also allow regulations to require fees to address specific public facility needs generated by the development, such as internal roads, utilities, parks, and community service facilities. G.S. 153A-341 and 160A-383 grant cities and counties the authority to regulate development “to facilitate the adequate provision of transportation, water, sewerage, schools, parks, and other public requirements.” These statutes provide municipalities authority to implement regulations necessary to assure adequate public facility requirements.

The authority to regulate on the basis of adequacy of public facilities is not, however, the same as authority to impose fees to address inadequacies in facility capacity. In many parts of the country impact fees, rather than general tax revenues, are used to finance the new roads, utilities, fire stations, parks, schools, and other public facilities that must be provided to service new development.

Recent court decisions have established a strong precedent that North Carolina cities and counties lack the statutory authority to impose school impact fees. In Durham Land Owners Association v. County of Durham, 177 N.C. App. 629, 630 S.E.2d 200, review denied, 360 N.C. 532, 633 S.E.2d 678 (2006), the court held counties do not have implied authority to impose school impact fees. The court held provision of schools is a general governmental obligation rather that a service provided to an individual for which a fee can be charged.

On August 19, 2016, the North Carolina Supreme Court took it one step further in the Quality Homes v. Town Carthage, 2016WL 4410716, case.  In the lower court ruling, the Court of Appeals held that the Town of Carthage possessed authority to charge “impact fees” for water and sewer services.

The town’s position was that the General Assembly had authorized it to charge water and sewer impact fees through the public enterprise statutes, which authorized the Town to establish water and sewer systems in the town’s discretion and to charge fees for these systems. In reversing the lower court, the Supreme Court found that these statutes empowered the town to charge fees only for the “contemporaneous use of its water and sewer systems”, and not fees for future use of these systems, and thus the town lacked “the power to charge for prospective services.”

While at first glance these decisions appear to favor a developer seeking to plan a new development, by reducing initial development costs, consider whether these decisions could stifle long term development in smaller municipalities that have not appropriately planned and allocated tax revenues towards infrastructure improvement? Development approval requires the availability of essential public facilities and denial where the project would lead to a degradation of facilities or services.

– Paul A. Sheridan