Impact Fee Deferral Programs

Impact fee deferral programs vary, as allowed by state law

Local governments collect impact fees to finance public facilities such as road improvements, schools, and parks

Cities, counties, and towns that plan under the Growth Management Act (GMA) are authorized to collect impact fees on new development. Impact fees are one-time charges assessed by local governments to help finance public facilities that will serve the new development. Under state law (RCW 82.02.050), impact fees can be used to pay for schools, parks and open spaces, transportation (road improvements), and new fire facilities.

Local governments are authorized to impose up to four different types of impact fees. The fees vary based upon need and local conditions. For example, the city of Deer Park collects only transportation impact fees, which cost $350 per single-family home, whereas the city of Issaquah collects all four types of impact fees, which cost a total of $38,705 per single-family home. Appendix A shows the type and amounts of impact fees charged by each city.

Local governments must allow builders to defer impact fees on new single-family homes

In 2015, the Legislature required counties, cities, and towns that collect impact fees for new single-family residential construction to adopt a deferral program.

Key provisions of the law include:

• Deferral programs must be implemented by September 1, 2016.
• Deferrals must be available upon request from the builder.
• Local governments can defer payments until final inspection, issuance of certificate of occupancy, or the closing of the first sale of the property. However, the deferral can be no longer than 18 months from the time the building permit is issued.

• The builder must grant and record a lien against the property in favor of the municipality equal to the amount of the deferred impact fee.

• The impact fee amount that the builder pays must reflect the fees in place when they applied for a deferral.

Local governments that had a deferral system in effect on or before April 1, 2015 are exempt from many of the law's provisions. The relevant sections of statute are in Appendix C.

98 out of 107 local governments have a deferral program as required by law

Exhibit 1.1: 98 local governments have a deferral program. Nine do not.

Source: Local government municipal codes.

JLARC staff identified 107 local governments that are required to have a deferral program in place because they collect impact fees.

• 98 of the 107 local governments have a deferral program. This includes 92 cities or towns and 6 counties (Clark, King, Kitsap, Pierce, Snohomish, Thurston).
• Of the 98, two cities have implemented partial deferral programs. Black Diamond collects school and fire impact fees, but allows deferral only for school impact fees. Pacific collects impact fees for parks and road improvements, but only road fees may be deferred.
• 18 of the 98 local governments had a deferral system in effect on or before April 1, 2015.

Nine cities have not yet implemented a deferral program

Nine cities and towns do not appear to have a deferral program.

In response to inquiries from JLARC staff:

• Deer Park confirmed it does not have a deferral program.
• Granite Falls, Maple Valley, and Everson report that they are in the process of developing programs.
• Algona, Carbonado, Gold Bar, Nooksack and Roy did not respond to inquiries about the status of their deferral programs.

Statute provided local governments with options in developing deferral programs

The law allows local governments establishing new deferral programs to decide:

• When to collect impact fees.
• Whether to impose a reasonable administrative fee.
• Whether to limit the deferral to the first 20 building permits per builder per year.

Local governments implemented programs using different combinations of these three factors. As a result, deferral programs vary among local governments.

Exhibit 1.2: Deferral programs vary in terms of timing, fees, and limits

Source: JLARC staff analysis of local governments' deferral programs.

The cost of administrative fees also varies

Statute authorizes local governments to collect reasonable administrative fees to cover the costs associated with reviewing and processing impact fee deferrals. Statute provides local governments the discretion to determine what costs are considered reasonable.

• Sixty local governments charge administrative fees, which range from $50 to $1,200 per single-family home. The median fee is $200.
• Some charge additional hourly fees for lengthy deferral applications.

In addition to administrative fees, deferral applicants also must pay a fee when they record a lien and another fee when they request release of the lien. In most counties, lien recording and release fees are $39 each, plus more for multi-page documents.

Legislative Auditor recommendation

Cities without a deferral program should pass an ordinance to adopt and maintain an impact fee deferral program for single-family residential construction as required by statute.

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Deferrals account for a small portion of all single-family building permits issued. Five local governments that have similar programs issued 91% of deferrals.

Twenty-two local governments issued deferrals. Of these, five issued 91% of deferrals.

Between 2018 and 2019, 22 local governments issued deferrals

Builders requested and received 3,741 deferrals from 22 local governments. This includes:

• 1,236 park impact fee deferrals.
• 1,189 traffic impact fee deferrals.
• 1,109 school impact fee deferrals.
• 207 fire impact fee deferrals.

Local governments did not report rejecting any applications.

Among the 76 other local governments that have deferral programs, 66 reported that they did not issue any deferrals and 10 did not respond to the JLARC staff request for information.

Five local governments issued 91% of deferrals

Ferndale, La Center, Redmond, Ridgefield, and Kitsap County issued 91% of deferrals. JLARC staff found that their deferral programs have the following in common:

1. Except for Ridgefield, the local governments established their deferral programs before passage of ESB 5923 in 2015 and were exempt from many of the law's requirements due to a grandfathering provision.
2. Local government staff believe their programs are successful because they worked with the building groups in the community.
3. The local governments do not require a lien for impact fee deferrals.
4. The local governments do not charge administrative fees for impact fee deferrals.
5. Staff integrated the deferral application into the building permit application so there are no additional steps, paperwork, or applications to complete.

Builders requested few deferrals from local governments that charge fees and require liens

Builders reported that they might avoid deferring impact fees if the process were complicated, time-consuming, or expensive. Most local governments require builders to:

• Request a deferral before the building permit is issued. Depending on the local governments, builders can request a deferral verbally, in writing, or online.
• Complete a separate deferral application form and pay an administrative fee for each single-family residence deferral.
• Sign and record a deferred impact fee lien for each single-family residence deferral before the building permit is issued.

Deferral use is infrequent and appears unrelated to the amount of home construction

Data indicates that deferral use has been infrequent and unrelated to permit activity. JLARC staff estimate that builders requested deferrals on 1,284 permitsOne permit could have up to four impact fees deferred (school, park, transportation, fire). , which is less than 5% of the estimated 26,990 permits issued for single-family homes by the 98 local governments with deferral programs. In addition:

• Of the five local governments 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.

Exhibit 2.1: Permits and deferrals appear unrelated

Source: JLARC staff analysis of local government data and US Census' Building Permit Survey.

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Local governments report that 99.9% of deferrals were repaid on time and that capital improvement projects have not been affected

Local governments report that 3 out of 3,741 deferrals were not fully and timely paid

JLARC staff analyzed 2018-2019 data provided by local governments and found that:

• Three out of the 3,741 deferrals were not paid on time or in full.
• $11 million out of approximately $323 million in impact fees was deferred.
• $13,000 of $11 million in deferred fees was not paid on time or in full.

To ensure deferrals are fully and timely paid, local governments report that they have implemented controls over the tracking and collection of deferred impact fees. These include the ability to withhold final inspections and certificates of occupancy until deferred fees are paid.

Exhibit 3.1 Local governments implemented internal controls to ensure payment of deferred fees

Source: JLARC staff summary of permitting and deferral processes.

Capital improvements have not been affected

Local governments, school districts, and fire districts told JLARC staff that deferrals have not caused delays in capital improvement planning or construction.

According to statute, local governments may not rely solely on impact fees to finance public improvements and must balance impact fees with other public funds. Further, they must consider other public funding sources when establishing their impact fee schedules. Stakeholders reported that impact fees comprise a relatively small portion of overall expenditures for capital improvements. Central Kitsap School District, for example, reported that impact fees provide $210,000 of the $3 to $5 million needed for capital projects each year, or 4.2% to 7%.

Local governments report that the impact to staff resources has been minimal

Local governments reported that while they did not track the costs of administering deferral programs, the impact to staff resources has been minimal. Some respondents provided reasons for this including:

• Integrating impact fee deferral tracking and collection into their regular building permit and inspection process avoided additional costs.
• Deferrals are not widely used, mitigating the time and resources needed to complete additional paperwork and reviews.
• While there were initial costs to establish deferral programs, the ongoing costs have been minimal.
• Because few deferrals were not paid on time or in full, local governments did not have to spend staff time and resources collecting delinquent payments.

Stakeholders report that the lien requirement was intended to protect their interests, but may be unnecessary or problematic

By law, local governments must require builders to record a lien against the property in the amount of the deferred impact fees. Local governments that established programs before the 2015 legislation are exempt from this requirement.

JLARC staff interviewed and corresponded with 52 stakeholders from local governments, lenders, and builders to better understand how deferral programs worked in practice.

• Eight of the 52 stakeholders either support the lien requirement or view it neutrally. The eight included lenders, cities, school districts, and builders.
• 26 stakeholders (including most of the builders, almost all of the lenders, and the five local governments that have issued the most deferrals) stated that the lien was unnecessary, an obstacle, or that it discouraged builders from pursuing deferrals.
• The remaining 18 stakeholders did not provide feedback on impact fee deferral liens.

Liens are one of many controls to protect local government interests

Stakeholders that support the liens noted that it is meant to protect local governments from builders defaulting, foreclosing, or failing to pay deferred fees. Others report that the lien is likely unnecessary because other controls (e.g., withholding final inspection or certificates of occupancy) protect the governments' interests. Furthermore, lenders require a certificate of occupancy before converting a construction loan to a traditional mortgage for the purpose of selling the house. JLARC staff learned of only one instance when the lien was used to ensure payment of deferred fees.

Stakeholders cited multiple reasons that liens may be problematic

• The lien may deter builders from requesting a deferral. Stakeholders reported that builders were apprehensive about recording liens against the property in favor of the city and would forgo deferring impact fees once they learned that a lien was required. Bellingham reported that builders abandoned six deferral requests because of the lien requirement.
• The lien may require extra time and resources to process, record, and track. Some local governments reported that they do not want to require liens because of the strain it puts on resources. For example, Ridgefield reported that its staff learned from other local governments that the lien requirement was cumbersome and time consuming. Although the city implemented its deferral program after the state directive, it did not include a lien requirement because it could cost money for both the city and the builders.
• The lien may complicate and delay construction financing. Most lenders said builders must meet special conditions before they will finance a project with an impact fee lien. These conditions include ensuring that the cost of the deferred fees is included in the construction budget and the builder is in good standing with the lender. Lenders also reported that banks and title companies often require additional approvals before the lien is recorded, which can delay financing.
• The deferral lien may take priority over the mortgage lien in foreclosure proceedings. Another condition for construction financing is that, in the case of foreclosure, the lien must have lower priority for repayment than the mortgage. However, a general rule in property lawCommonly known as "first in time, first in right." says that the lien recorded first takes higher priority. Since the impact fee lien is often recorded before the mortgage lien, it is difficult for builders to meet this condition.
• The lien may delay sale. Lenders stated that liens also may delay the sale of the house. Additionally, it may take several days or weeks for a local government to release the lien after the deferred fees are paid, further delaying the sale.

Four local governments do not require liens, despite the mandate to do so

The cities of Brier, Ridgefield, Fife, and Burlington implemented a deferral program after the 2015 legislation and do not require liens as part of their deferral process. City staff report that because they are able to withhold final inspection or certificate of occupancy until the deferred fees are paid, their risk of securing payment is significantly reduced. City staff believe that the processes and internal controls they implemented as part of the deferral program eliminated the need for a lien.

Legislative Auditor recommendation

The Legislature should consider whether liens are a necessary tool to ensure that deferred fees are paid.

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In today's housing market, models estimate cost savings of no more than $1,500 per home. Deferrals could have greater benefit in the future.

There may be a financial benefit to builders who defer impact fees

Impact fees are collected from builders when the building permit is issued. Builders that do not defer impact fees typically finance them with a construction loan or pay them out of pocket. If they finance the fees, builders must pay interest on the loan until the house is sold. Deferring impact fees allows builders to delay paying impact fees upfront, which can save money by reducing finance costs.

Financial benefit varies depending upon market conditions and city administrative fees

There are four major factors that influence the financial benefit of deferring impact fees: amount of the impact fees, interest rates, deferral period (how long the builder defers fees), and the administrative and lien fees.

JLARC staff created a model that shows how the financial benefit changes as these variables change. In general, the model indicates that:

• If impact fee amounts, interest rates, and/or the deferral period increase, builders will likely have greater financial benefit.
• The amount of financial benefit can fall depending on the amount of the administrative and lien fees.

JLARC staff also modeled the financial benefit of deferring fees for the 98 local governments with deferral programs. The estimates created by the model use a range of interest rates and deferral periods.

The analysis suggests that builders benefit from deferring impact fees in more cities and counties when interest rates and deferral periods increase. For example, as shown in Exhibit 4.2, assuming a 4.25% interest rate and a 9-month deferral period, the model predicted at least some financial benefit if builders deferred fees in 63 local governments. In contrast, assuming a 10% interest rate and an 18-month deferral period, the model predicted that there would be a financial benefit to builders who deferred fees in 94 local governments.

An interactive version of the model is available in Appendix B.

Exhibit 4.2: Builders receive greater financial benefit from deferrals in more local governments when interest rates and deferral periods increase

Source: JLARC staff analysis of the costs and benefits of deferring fees in 98 local governments.

In today's housing market, cost savings from deferrals are minimal

In today's housing market, lenders and builders report that the current interest rate on construction loans is between 4.25% and 6% and that single-family homes are built and sold within 9 months of receiving a building permit. Using these assumptions, JLARC staff modeled the estimated savings a builder may realize from deferring the payment of impact fees:

• Assuming a 4.25% interest rate, the model estimates a maximum benefit of $998 per home.
• If the interest rate is at 6%, the model estimates a maximum benefit of $1,500 per home.
• For Kitsap County, which has issued the most deferrals, the model predicts a savings of between $89 and $181 per home.

Builders report that other factors influence their decision to defer

Builders reported additional costs that are not in the model. These costs, which could reduce or eliminate the financial benefit, include:

• Staff time and resources to complete deferral applications.
• Travel time to record liens.
• Attorney and consultant costs to review deferral and lien documents.

In addition, there are non-cost factors that may influence a builder's decision to defer:

• Construction lenders may be unwilling to finance loans in which liens are recorded against their properties.
• Obtaining a lien release may delay the sale of a house. A builder may be unwilling to risk delays for a deferral.

In interviews, several builders and lenders noted that impact fee deferrals have not been appealing because of the additional costs, time, resources, and risks to financing and sale.

Builders suggested that deferring fees may be more attractive in a less favorable economy

In the current housing market, houses are selling rapidly. The Washington Center for Real Estate Research reports that there is low housing inventory and high demand for homes.

Builders and construction lenders also report that interest rates for construction loans are low. The prime rate, which lenders use to set the interest rates for construction loans, is the lowest it has been since the law requiring deferral programs went into effect. Because financing costs are low, the savings from deferring impact fees may be negligible.

Nevertheless, builders assert that the option to defer impact fees remains valuable. Although not widely used now, deferrals may be more appealing in the future, particularly if interest rates increase and houses do not sell as quickly.

Department of Commerce directed to monitor future use of deferrals

The Legislature directed the Department of Commerce (Commerce) to collect and report information about the number of deferrals requested, issued, and not paid on time or in full.

If the Legislature wants information about whether deferral use and costs change in the future, Commerce will need to collect information not currently required by statute. This includes administrative costs, amount deferred, and the amount not paid on time or in full. However, since deferrals are not widely used and there have been few issues for local governments, ongoing monitoring by Commerce may be unnecessary.

Legislative Auditor recommendation

The Legislature should either repeal Commerce's data collection or identify which measures Commerce should collect that would be helpful for evaluating program use.