Impact Fees And The Missing Math That Puts Deals At Risk
Higher-for-longer borrowing costs. Slow local approvals. Insurance uncertainty. Labor strain. And above all, a wary homebuyer still licking wounds from 7% mortgage rates and sticker shock from inflation’s multi-year march.
As project math gets tougher to make work, landowners, developers, and builders across the country are being forced to recalibrate. But in the race to rationalize — sharpening pencils on everything from dirt pricing to carry costs — there’s one critical number in the capital stack equation that often gets left on autopilot: builder fee assumptions which include development impact fees (“DIF”), school fees, utility hook-up fees, building permits and other fees charged by jurisdictions and utility providers (collectively, “Fees”).
Fees are generally the second largest line item on a developer’s pro forma after finished lot costs,” says Carter Froelich, Managing Principal at Launch Development Finance Advisors. “That means there’s a huge opportunity for developers and builders to collaborate and be more intentional about how those Fees are structured."
According to Froelich, this means that both parties have to be at the table with an impact fee consultant that only works with the private sector, such as Launch, when the public agencies are estimating Fees to ensure that the Fees are fair, equitable, and adhere to the tenets of the dual rational nexus test, industry standards, and state enabling legislation.
Froelich isn’t suggesting builders charge less for their product. Instead, he’s making the case that Fees—if calculated around a consistent logic tied to nexus and rough proportionality—can be a lever to unlock more land residual value, increase take-down velocity, and create better-aligned outcomes across the board.
When ‘2 and 10’ No Longer Works
In many markets, builder Fee structures have followed what Froelich calls a “rule-of-thumb carryover” from stronger sales cycles: $2,000 per lot or 10% of home price, often with little differentiation by product type, fee type, or timing of Fee payments. But today’s more fragile economics demand better answers.
A lot of builders are very good at understanding costs to construct homes, and developers are sharp on entitlement and infrastructure. But the actual Fee structures between the two often aren’t grounded in project-and jurisdictional-specific realities,” Froelich explains. “There’s a better way to do this.”
The better way, in Launch’s framework, starts with re-grounding all Fee assumptions in the core metric that governs project feasibility: land residual value. In other words, how much value is left over to pay for land once all horizontal and vertical costs—including Fees —have been accounted for?
If a builder is assuming a flat 10% fee regardless of location and the specific Fees that are levied by the jurisdictional agencies, that may be too blunt an instrument for a more nuanced land plan,” says Froelich.
Launch has created diagnostic templates that allow builders and developers to model different cost and Fee structures across various scenarios. The goal is to help both sides arrive at an arrangement that still covers builder costs, fairly compensates developers for risk, the time value of money, and maximizes project viability for both.
Reframing Fees as Value-Creation Levers
Why does this matter? Because in today’s market, every sliver of land residual value that can be enhanced can be the difference between a stalled deal and a go-forward plan.
Public agencies may not be eager to reduce Fee expectations voluntarily. Nor should they. However, landowners, developers, and home builders have a growing incentive to bring rigor and transparency to how those Fees are calculated.
Regardless of the Fee amount, we’re not here to second-guess what builders charge. That’s their business,” Froelich notes. “But what we can do is review all Fee studies prepared by public agencies, and ensure that Fees are being charged based on a nexus to project impacts and are proportional to existing levels of service. Since we began reviewing jurisdictional Fee studies, we have been able to lower Fees an average of 22%.”
In Launch’s project work across multiple U.S. markets, this approach has yielded Fee strategies that align project costs, phasing, and absorption, impact on existing jurisdictional levels of service, and document builder Fee credits (especially when tied to special district financing), to help both parties answer today’s most challenging question: Can this land deal pencil?
Best Practices to Make It Work
Here are three takeaways from Launch’s builder Fee work that Froelich believes have practical application across markets:
- Start Early
Fee assumptions should not be a late-stage input in land acquisition or entitlement modeling. "We encourage developers to bring builder partners into the pro forma conversation as early as possible,” Froelich says. “Not just for transparency, but because it’s in both parties’ interest to get the math right upfront.” - Determine Actual Fees
Rather than defaulting to ”rules of thumb”, Launch recommends that developers either provide, or builders commission Launch to prepare a Builder Fee and Finance Summary™ which details the Fees to be paid by builders for their specific product mix based upon the Fees charged by the public agencies, Fee credits to be passed on the builder as a result of special district financing and/or possible net bond proceeds the builder could realize if special district proceeds are available to fund in-tract improvements. “This way, there will be no surprises when the builder’s operations department goes to pull permits at the public agency’s permit window. There is nothing more devastating to a builder’s pro-forma than assuming you're going to pay $20,000 per unit, when in reality, it is $39,000 per unit,” Froelich says. - Model Multiple Deal Structures – If the developer and builder sit down and explore different deal structures (e.g. super-pad sales, finished lot sales, front-end, back-end, hybrids) and run multiple pro forma variations with accurate Fees, Fee credits, special district bond proceeds to the builder (if applicable), and both parties are working in good faith; you can usually set up a “win-win" deal structure.
Not a One-Size-Fits-All Fix
To be clear, this isn’t a one-size-fits-all prescription. Fee structures will always vary by jurisdiction and project type. But what Launch is surfacing is a strategic blind spot—a widely accepted input that may no longer reflect today’s project complexity and capital stack constraints.
Our whole aim is to help builders and developers find win-win structures that are rooted in real numbers,” Froelich emphasizes. “If we can reduce friction, increase certainty, and create a cleaner path to land take-downs, everybody wins.”
For builders and developers trying to thread the needle between cost, risk, affordability, and velocity, revisiting Fee structures may not be the silver bullet—but it could be a release valve.
Reclaiming Land Residual – A Systematic Roadmap
What begins with tightening assumptions and enforcing discipline around Fees opens the door to a broader strategy. Carter Froelich sees this first principle—grounding deal feasibility in accurate, defendable land valuation—as the gateway to a suite of more advanced, but equally essential, levers that builders and developers can pull to recapture value.
Here’s how the roadmap unfolds:
1. Challenging Impact Fees – Today’s narrative has focused on this first, foundational effort: reviewing jurisdictional Fees to ensure they are fair and equitable and adhere to statutory and legal requirements.
2. DIF Credits & Reimbursements – Next comes the determination of actual Fees and Fee credits based upon the jurisdiction’s real Fees as well as the specific infrastructure and funding realities of the project. Properly structured Fee credits and other infrastructure reimbursement protocols can meaningfully enhance land values and be “another chip on the table that the developer and builder can utilize to structure a deal,” Froelich says.
3. Shifting Infrastructure Cost Burdens – When utility and/or roadway systems are oversized to accommodate future phases or off-site beneficiaries, precise reimbursement mechanisms become critical. The structure must require full, fair-share cost recovery at the time of final plat or first construction permit—no exceptions, no deferrals.
4. Special Purpose Taxing Districts – Districts like CFDs, MUDs, Metro Districts, and CDDs can play an integral role in capturing future incremental value to fund upfront improvements—turning capital constraints into long-term financing tools.
5. Aggregation and Institutionalization – The real power lies in the compound effect. Minor, technically sound adjustments—when repeated, documented, and embedded into formal agreements or district structures—unlock compounding gains to the land residual. This is where deals move from “penciling out” to outperforming.
As Froelich frames it: the key to unlocking value in today’s toughest deals isn’t in finding silver bullets—it’s in assembling a complete toolkit, applying each piece rigorously, and memorializing it in writing.