The Infrastructure Cost Squeeze And What Builders Can Do

Infrastructure costs and impact fees remain the persistent financial burdens in residential development. Site grading, roads, water systems, sewer lines, drainage, utilities and development impact fees are rising faster than home prices can absorb them. For builders operating on already compressed margins, the question is how to finance these costs without passing every dollar through to the buyer or sacrificing project feasibility altogether.

To explore what builders can do, I sat down with Carter Froelich, a CPA and Managing Principal of Launch Development Finance Advisors, a national consulting firm that has spent four decades helping developers and builders finance infrastructure, reduce costs and protect margins.

John McManus: Carter, the phrase “infrastructure cost squeeze” gets used a lot. What’s actually driving this, and why is it getting worse?

Carter Froelich: The core issue hasn’t changed in forty years, builders need roads, water, sewer, drainage and parks before they can deliver homes. What has changed is the magnitude of the financial obligation and the number of directions it’s coming from.

Municipalities across the country are increasingly shifting infrastructure costs onto new development through impact fees, hook-up charges, inspection fees, gold-plated infrastructure, oversizing requirements and design stipulations. Many jurisdictions raise impact fees annually, and at the same time, the cost of the infrastructure itself, materials, labor and engineering has escalated significantly.

So you have the impact fees going up, the hard costs going up and the builder is carrying a larger share of the total financial load than at any point I can remember. When you layer in high interest rates, inflexible bank terms and cautious buyers, the margin pressure becomes very real, very fast.

John McManus: When you talk about impact fees and infrastructure costs, are those the same thing? And who’s actually in a position to push back on impact fees?

Carter Froelich: That’s an important distinction, and it’s one that gets blurred in most conversations. Infrastructure costs are the hard dollars required to physically build the improvements, the roads, the utilities, the grading and the drainage facilities. Development impact fees are charges assessed by a jurisdiction to fund the broader public infrastructure that new development is deemed to require, such as fire stations, parks, libraries and transportation improvements. They’re related, but they’re governed by different rules and addressed through different strategies.

On the impact fee side, the heavy lifting of negotiating fee levels is typically done by the Home Builder Associations (HBA) at the state and local level. They represent the industry in impact fee adoption proceedings, challenge methodologies and advocate for reasonable impact fee structures. That’s their role, and they do important work. What we do is different.

We review impact fee methodologies on behalf of HBA’s for accuracy, adherence to enabling statutes and case law because the fee studies are most always incorrect. Jurisdictional fee studies frequently contain errors or outdated assumptions and drive-up impact fees.  Additionally, our firm calculates and pursues development impact fee credits for infrastructure that a builder constructs, which the jurisdiction would otherwise fund through its impact fee program. Those impact fee credits can be substantial, and we want to make sure we are maximizing our clients’ impact fee credits and ensuring that they are being credited at the permit window.

But here’s the bigger point: impact fees, as significant as they are, represent only one piece of the total infrastructure cost picture. The real opportunity for builders is in how they approach the full scope of infrastructure obligations and that requires starting with a more fundamental question.

John McManus: What’s that fundamental question?

Carter Froelich: What problem am I actually trying to solve?

It sounds simple, but it’s the step that gets skipped most often. Every development project carries a unique set of infrastructure-related financial challenges. Some projects are capital-constrained; the builder doesn’t have the cash to fund the required infrastructure. Some face infrastructure obligations that dwarf the available bonding capacity of a special taxing district. Some are building oversized public improvements that benefit adjacent landowners who aren’t contributing anything. The problems are different on every deal.

The mistake we see most frequently is reaching for a financing tool before clearly defining which problem needs to be solved first. A builder will say, “I need a special district,” when what they actually need is a phasing strategy that aligns infrastructure construction with project capacity needs. Or they’ll focus on reducing an impact fee when the bigger opportunity is recovering costs they’ve already spent.

The disciplined approach is to identify every infrastructure-related financial challenge on the project, prioritize them by impact and urgency, solve the most pressing one and then move to the next. This sequencing matters because the solution to problem one often changes the parameters of problem two.

A special district that generates bonding capacity may also create a mechanism for cost-sharing with adjacent landowners. A development agreement that addresses phasing may also unlock DIF credits that reduce the builder’s fee amount at the permit window. You can’t see those connections if you’re jumping straight to products.

John McManus: Once you’ve identified and prioritized the problems, what does the actual cost management process look like?

Carter Froelich: The first analytical exercise we run on every infrastructure budget is what we call The Red Analysis. The name comes from the three actions we’re trying to take on every line item: Reduce, Eliminate or Defer costs.

Reduce means finding ways to lower the actual cost of a required improvement. That might mean negotiating scope with the jurisdiction, phasing construction to match absorption or right-sizing improvements to reflect the project’s current needs rather than building to ultimate capacity on day one. A common example: if a four-lane collector road is required at buildout, but the project only generates the traffic volume to justify two lanes for the first several years, a phased construction approach lowers the peak capital in the early stages of the project.

Eliminate means identifying costs that should not be borne by the builder at all. These are improvements that benefit other landowners, oversized facilities that serve regional demand beyond the project or infrastructure that the jurisdiction should be funding through its own capital improvement program.

Defer means pushing costs forward in the project timeline and aligning larger infrastructure expenditures with revenue events such as parcel sales or district bond issuances, so that the builder is not funding millions of dollars in improvements years before the first dollar of revenue arrives.

The Red Analysis helps us reshape the budget so that what remains is truly the builder’s obligation, right-sized and timed to the project’s cash flow.

John McManus: After you’ve reduced the budget through The Red Analysis, how does the financing side work?

Carter Froelich: This is where it gets powerful, because the goal is not to find one financing source, it’s to layer as many mechanisms as possible so that the builder’s direct cash spend is minimized and capital recovery occurs through multiple channels over the life of the project.

The available tools vary by state, but the menu is broader than most people realize. Special district bonds, whether from a Community Facilities District in California, a Public Improvement District in Texas, a Municipal Utility District, a Community Development District in Florida or a Metro District in Colorado, can finance eligible public infrastructure through the municipal bond market, potentially shifting the capital burden off the builder’s balance sheet entirely.

Development impact fee credits reimburse the builder for infrastructure they construct that the jurisdiction would otherwise fund through its fee program. Tax increment financing captures the property tax uplift from new development and redirects it to fund infrastructure. Cost-sharing agreements allocate costs among multiple benefiting landowners proportionally. Latecomers’ fees ensure that future builders who connect to or benefit from infrastructure they didn’t help build contribute their fair share. Reimbursement districts formalize the recovery of costs over time. And in some cases, the jurisdiction itself participates directly through its capital improvement program.

When you layer these sources together, the economics of the project change fundamentally. Instead of the builder writing checks for infrastructure and waiting years to recover that capital through lot sales, you create a financing plan where costs are funded through bonds, reimbursed through credits, shared with adjacent beneficiaries and recovered through district mechanisms. The builder’s cash exposure is limited to the gaps between those sources.

The projects that produce the best returns are consistently the ones where the financing plan was designed before the first shovel hit the ground, not after the money was already spent.

John McManus: What’s your advice for a builder reading this who wants to start applying this thinking?

Carter Froelich: Start by resisting the urge to jump to a solution before you’ve mapped the problem. Before you form a district, before you challenge an impact fee, before you sign a development agreement, step back and ask: what are all the infrastructure-related financial challenges on this project, and which one, if solved first, creates the most value or unlocks the most optionality for everything that follows?

Then apply The Red Analysis to every line item in the infrastructure budget. What can be reduced? What shouldn’t be your cost at all? What can be deferred until revenue is flowing?

And then build the financing plan, not around a single mechanism, but as a layered strategy that combines every available source of capital recovery: district bonds, DIF credits, cost sharing, latecomers fees, TIF and jurisdictional cost participation. The goal is simple: limit your cash spend, reduce your total costs and create as many paths to infrastructure reimbursement as possible.

The builders who treat infrastructure finance as a strategic function, who bring this thinking to the table at the same time they’re negotiating the land deal, not six months after they’ve closed, are the ones who consistently outperform on margins and returns. The infrastructure cost squeeze is real. But the tools to address it are equally real. The key is deploying them early enough to matter.

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