Impact fees
An impact fee is a one-time charge the City assesses against new development to recover the cost of the water/sewer capital infrastructure that development's demand requires - pipes, lift stations, treatment capacity - rather than spreading that cost across the existing ratepayer base.
How the City converts demand into LUEs (Secs. 86.294, 86.298, 86.299)
Every impact fee is the product of two numbers: a count of service units (LUEs), and a dollar rate per LUE. The development agreement freezes the rate. The count is governed by the City's ordinance, and the method the ordinance uses turns out to matter as much as the frozen rate does.
- One LUE is 0.41 gpm. Sec. 86.294 defines a service unit as a living unit equivalent "based upon the relationship of the maximum design water flow to that of single family residential peak demand as served by a [fraction]-inch displacement-water meter," and fixes that single-family peak demand at 0.41 gpm.
- The input is peak water flow, calculated from plumbing fixtures. Sec. 86.294 defines "peak flow calculation" as "the calculation of water demand based upon the proposed fixture types using city approved methodology." Under Sec. 86.299(b)(1)(a), where industrial or commercial equipment makes a fixture count unworkable, water demand comes from manufacturer data and is added to the fixture-count flow.
- Wastewater LUEs are derived from the water number. Schedule 1 has a single input column, "Calculated Peak Water Flow (gpm)," and both the water utility and wastewater utility fee tiers hang off it. The sewer fee is not based on measured or projected sewer discharge.
- The applicant produces the calculation. Under Sec. 86.299(b)(1), peak water demand "is to be determined initially by the applicant and is subject to review and approval by the director," who may require building plans, plumbing layouts and flow calculations.
Schedule 1 is a step table, not a rate
The conversion from peak water flow to LUEs is not a division. It is a nine-row lookup table, and it is steeply non-linear:
| Calculated peak water flow (gpm) | LUEs | Implied LUEs per gpm |
|---|---|---|
| 1 to 10 | 1.0 | 0.10 |
| >10 to 15 | 2.0 | 0.13 |
| >15 to 25 | 4.0 | 0.16 |
| >25 to 50 | 6.0 | 0.12 |
| >50 to 80 | 8.5 | 0.11 |
| >80 to 160 | 32.5 | 0.20 |
| >160 to 250 | 64.5 | 0.26 |
| >250 to 500 | 104.0 | 0.21 |
| >500 | 150.0 + (peak gpm − 500) / 0.41 | 2.44 marginal |
Two things happen at the 500 gpm line. The count jumps discontinuously from 104 LUEs to 150 LUEs, and the marginal cost of the next gallon per minute rises from about 0.21 LUEs to 2.44 LUEs, roughly a twelvefold increase. Below 500 gpm the table charges a small fraction of what the ordinance's own 0.41 gpm definition of a LUE would imply. Above it, the table charges exactly that definition.
| Same 2,000 gpm, delivered as... | LUEs charged | Wastewater fee at $2,684 / LUE |
|---|---|---|
| One connection at 2,000 gpm | 3,809 | $10,223,356 |
| 4 connections at 500 gpm | 416 | $1,116,544 |
| 25 connections at 80 gpm | 213 | $571,692 |
| 200 connections at 10 gpm | 200 | $536,800 |
An eighteen-fold spread, for the same water and the same load on the same treatment plant. A 2,000-acre park built out as dozens of separately permitted buildings sits near the cheap end of that range by default.
Rate schedule history
Sec. 86.294 lists five base (1.0 LUE) rates for water and wastewater service, each reflecting a periodic re-study of infrastructure cost:
| Rate schedule takes effect | Water $ / LUE | Wastewater $ / LUE |
|---|---|---|
| Prior to 10/4/2002 | $363.00 | $527.00 |
| After 12/31/2003 | $2,466.00 | $2,185.00 |
| After 12/31/2013 | $2,285.00 | $3,506.00 |
| After 4/30/2018 - this is the rate SMART is frozen at | $3,801.00 | $2,684.00 |
| Ord. 2026-29, effective 10/1/2026 - passed first reading 6–1 on August 5, 2026; second reading September 1, 2026 | $14,519.00 | $11,161.00 |
March 19, 2019 - the date the SMART Terminal agreement's fee freeze refers to - falls between the 4/30/2018 update and the proposed 9/30/2026 update. No rate change happened in between, so "2019 rates" and "the after-4/30/2018 schedule" are the same number.
Development agreement provisions
The 2023 SMART Terminal development agreement (superseding the original 2019 agreement) sets two terms that determine the fee outcome:
- Impact fees frozen at March 19, 2019 rates - fixed regardless of subsequent City fee schedule updates.
- 2,108 LUEs of wastewater service guaranteed - contractually reserved sewer capacity, under Section 1.07.D.3. Note that this is a separate provision from the fee freeze in Section 1.05.A.3, and that it is wastewater only; the agreement states no water LUE figure.
Applying the frozen rate and the proposed 2026 rate to that same LUE count:
$2,684 / LUE
$11,161 / LUE
| Scenario | Rate / LUE | × 2,108 LUEs | Total wastewater impact fee |
|---|---|---|---|
| SMART pays this (frozen 2019 rate) | $2,684.00 | 2,108 | $5,657,872 |
| City's own 2026 study says this is the real cost | $11,161.00 | 2,108 | $23,527,388 |
| The gap | $17,869,516 | ||
What the tenant pipeline implies about LUEs
The 2,108 LUE figure only matters in relation to what the site will actually need. The City's released RFI correspondence for the 23 documented prospective tenants includes stated water and wastewater demands for most of them, which makes this a calculation rather than a guess. Running those figures through Schedule 1 gives the table below.
Currently active, shortlisted or pending
| Project | Stated demand | Peak gpm | LUEs |
|---|---|---|---|
| Project North Star Advanced magnetics (rare-earth-free) Active, decision Jul/Aug 2026 | 1,400,000 gpd | 972 – 1,944 | 1,301.8 – 3,673.0 |
| Project Vista Prism Electronics manufacturing Active, in discussion | 576,700 gal/hr | 9,612 | 22,373.6 |
| Project Thomas Train Gas turbines powering data centers Active | 870,000 gpd | 604 – 1,208 | 404.1 – 1,877.6 |
| Project Neighborhood Club Critical minerals processing Active, requirements met | 414,625 gpd | 288 – 576 | 104.0 – 335.0 |
| Project Savannah Pharmaceutical API / mAb Shortlisted | 350,000 gpd | 243 – 486 | 64.5 – 104.0 |
| Project Frontier Architectural products Active | 216,300 gpd | 150 – 300 | 32.5 – 104.0 |
| Project Lassen High-salinity industrial Active, under evaluation | 150,000 gpd (sewer) | 104 – 208 | 32.5 – 64.5 |
| Project America Flag Tire manufacturing Shortlisted | 137,000 gpd | 95 – 190 | 32.5 – 64.5 |
| Project Matcha Latte Ceramic pavers Active | 50,000 gpd | 35 – 69 | 6.0 – 8.5 |
| Project Skate Board Aerospace PCB Unresolved | 50,000 gpd | 35 – 69 | 6.0 – 8.5 |
| Project Mount Fuji High-purity magnesium oxide Active, site tour Mar 2026 | 47,560 gpd | 33 – 66 | 6.0 – 8.5 |
| Project Sling Shot Steel pipe manufacturing Pending | 19,196 gpd | 13 – 27 | 2.0 – 6.0 |
These projects are competing for the same ground, so the column does not sum to a buildout total. But a combination that fits the acreage does. Taking North Star, Savannah (~200 ac), Frontier (60–80 ac), Neighborhood Club (1,000 ac), Matcha Latte (100 ac), Mount Fuji and Sling Shot (120 ac) together uses roughly 1,500 stated acres, which is close to the site's developable area, and produces about 1,517 to 4,239 LUEs. The 2,108 reservation sits inside that range.
Projects the City turned away, and what they would have needed
Several prospects were declined on water grounds. Their demands illustrate how quickly heavy industrial water use overwhelms a 2,108 LUE reservation. These use the continuous-operation conversion only, which is the low end of the method above:
| Project | Stated water demand | Peak gpm | LUEs |
|---|---|---|---|
| Project Roller Coaster Semiconductor ($10B, 5,100 jobs) Not recommended - water | 15,400,000 gpd | 10,694 | 25,014.5 |
| Project Horizon Mill B Steel mill / DRI No submission - water | 9,000,000 gpd | 6,250 | 14,174.4 |
| Project Golden Eagle Sun Solar manufacturing No submission - timeline | 1,000,000 gpd | 694 | 624.3 |
| Project Fiber Optics Fiber optics manufacturing Deadline missed | 505,000 gpd | 351 | 104.0 |
| Project Apex Prime Wheat-to-pasta processing Declined | 300,000 gpd | 208 | 64.5 |
| Project Hat Trick Metal smelting No submission - prohibited | 150,000 gpd | 104 | 32.5 |
Where the new rate stands: Ordinance 2026-29
The 2026 schedule is no longer a draft. On August 5, 2026 City Council took up Ordinance 2026-29, which amends Sec. 86.294 to add the new fees, and passed it on first reading by a vote of 6 to 1, Council Member Mendoza opposed. Assistant Director of Engineering Richard Reynosa introduced consultant Ethan Shires of Freese and Nichols, who presented the study behind the increase.
The minutes confirm the two per-unit figures used throughout this page, described at the meeting as "proposed maximum impact fees of $14,519 per water SUE and $11,161 per wastewater SUE." Staff and the minutes use "SUE" (service unit equivalent) where the ordinance text uses "LUE"; they refer to the same unit.
Staff stated the platting rule on the record
Two passages in the minutes state the City's own position on when a rate attaches, and they track Sec. 86.298(a)(2) exactly:
"Council Member Mendoza asked if the new rates apply to already-planned or under-construction developments, and Assistant Director Reynosa clarified that plats recorded before October 1, 2026, keep the current rates."
City Council Regular Meeting Minutes, August 5, 2026, Item 9
The freeze was not discussed
No speaker, Council Member or staff member mentioned the SMART Terminal, Axis, or TriTexas project, Franklin Mountain, or the development agreement's frozen 2019 rate at any point in the item. The public comment and Council discussion concerned housing affordability, homebuilders, and the Kissing Tree subdivision. The single largest frozen-rate exposure in the city does not appear in the record of the meeting that quadrupled everyone else's fee.
One exchange is a pointed contrast. Jeff Howard, an attorney representing Brookfield Residential, proposed among other options "allowing prepayment at current fees to help the city's near-term revenue." Other developers were at the podium asking to be allowed to lock in the 2018 schedule. This project's agreement asserts a lock at the 2019 schedule, which is the same numbers, without prepaying anything.
The SB 1883 audit does not reach contractual rate freezes
Item 8 of the same meeting received the independent financial audit newly required by Senate Bill 1883, performed by JMS CPAs and dated February 24, 2026. It is a statutory precondition rather than a formality: Tex. Loc. Gov't Code §395.059(a) provides that "before a political subdivision may increase an existing impact fee... the political subdivision must conduct an independent financial audit." The City appears to have satisfied the procedural requirements, including §395.059(b)(2)'s rule that the auditor not have been under contract for other services in the preceding 12 months.
The minutes summarize the engagement as having "examined collected fees, accrued interest, expended funds, waived fees, refund requests, and any errors or omissions dating back to 2018," with findings confirming "full compliance." That is accurate for what was examined. The report itself is narrower than the summary in two ways that matter here.
A rate frozen by contract is not a §395.016(g) waiver. It therefore falls outside the audit by legislative design rather than by any oversight on the part of the City or the accountants. The consequence is that nothing in the statutory audit framework requires a city to quantify contractual rate commitments before raising its fees, and nothing in the August 5 record does so.
The report does supply useful totals for the period: $44,514,174 in impact fees collected and $5,088,969 in accumulated interest, against $26.6 million in collected impact fees still unspent as of September 30, 2025 ($15.8 million water, $10.8 million wastewater). It also lists unconstructed capital projects funded by impact fees, totaling $6.85 million on the water side and $54.4 million on the wastewater side. Two of those unconstructed projects recur elsewhere in this research: the Gary Job Corps Lift Station (LS #46) decommissioning, which the SMART Development FM 110 Gravity Main is intended to accomplish, and the Highway 80 Lift Station Expansion, on which the wastewater service timeline for prospective tenants depends.
What is still open before the second reading
Council did not treat the first reading as final on details. Council Member Gonzalez asked whether Council could adopt the maximum rate now and add credits later, and City Attorney Aguirre said yes. Council Member Rodriguez asked staff to explore incentives for affordable housing, infill and green building before the second reading. Mayor Hughson stated that "tonight's vote is for what is in the packet with the understanding that possible amendments, incentives, and credit structures will be explored before the second reading on September 1, 2026." Two speakers asked for a tiered or service-area-based structure rather than a flat citywide fee.
What happens above 2,108 LUEs
If the site's charged LUE count passes the number the agreement reserves, does the 2019 rate still apply to the excess? Three sources speak to this, and they do not align.
Where the 2,108 came from, and what happened to it
The figure is not an engineering projection of what this site needs. Section 1.07.D.3 of the agreement reads:
Development Agreement, Section 1.07.D.3
So the number is an allocation inherited from a different agreement covering different land, carried across when Franklin Mountain's acreage moved out of Cotton Center and into this agreement. That explains why it does not correspond to any demand calculation for this project: it was never sized against one.
The City's ordinance: additional units get the current rate
Sec. 86.298(b) is the most direct answer available, and it is mandatory:
San Marcos Code of Ordinances Sec. 86.298(b)
Read on its own, that means LUEs beyond the assessed or agreed quantity are charged at whatever rate is current when they are assessed. At the proposed schedule that is $11,161 per wastewater LUE rather than $2,684, a difference of $8,477 per LUE.
State law: the same direction, less explicitly
Texas Local Government Code Sec. 395.017 provides that after assessment of impact fees "or execution of an agreement for payment of impact fees," fees may not be increased "unless the number of service units to be developed on the tract increases," and that in that event "the impact fees to be imposed are limited to the amount attributable to the additional service units."
Two things follow. Sec. 395.017 does not itself name a rate; the rate comes from Sec. 395.016(d) and Sec. 86.298(a), which fix it at the time of assessment. And more importantly, Sec. 395.017 is the provision that gives an assessment or an agreement its lock-in effect in the first place, and it carves additional service units out of that protection on its face. A freeze that depends on Sec. 395.017 cannot escape Sec. 395.017's own limitation.
The agreement: no ceiling at all
The development agreement's own language points the other way, and it is broad:
Development Agreement, Section 1.05.A.3
No service-unit limit, no acreage limit, no end date. The 2,108 LUE figure appears in a separate provision reserving sewer capacity, not as a cap on the freeze. So the ceiling, if there is one, comes from the law rather than from the contract, and the owner's position will be that Sec. 1.05.A.3 covers every fee the City ever charges on this land.
The City's stated position
Asked directly which controls where an agreement and the Code point in different directions, Assistant Director of Engineering Richard Reynosa answered in writing:
City staff response to written questions, August 28, 2026
That is the City's answer to the question this section poses, and it is broader than the question required. It concedes both Sec. 86.298(b) as it stands and Ordinance 2026-29 itself, and it is not limited to this development. It came from engineering staff rather than from the City Attorney, so it states the City's operating position rather than a legal opinion, and it does not resolve the state-law question below. But the City's default rule and the City's position on this agreement can no longer both be described as undetermined.
Why the answer is still not settled
A contract term may well displace a city ordinance, so Sec. 86.298(b) alone does not end the argument. What a contract cannot do is give the City authority the Legislature withheld, which is why the state-law question is the one that matters. And the authority for an impact fee agreement, Sec. 395.018, is narrow in two ways at once:
Tex. Loc. Gov't Code Sec. 395.018
No plats have been recorded for this property. And the authority granted reaches the time and method of payment, not the amount. Whether the general authority in Sec. 212.172(b)(9) to include "other lawful terms" in a development agreement absorbs a rate freeze that Chapter 395 does not itself authorize is an open question, and Sec. 395.073 provides that state and local restrictions on impact fees are cumulative rather than displaceable. This page sets out the texts; it does not resolve them.
The practical catch
What could be settled now, without litigation
Sec. 86.297(b) requires the fee per service unit to be "established by ordinance of the city council," and Ordinance 2026-29 has passed only its first reading. The second reading is set for September 1, 2026, and the Mayor has already stated that amendments, incentives and credit structures are open for discussion before it. Staff have now given their answer, so the remaining question is narrower: whether the City Attorney and Council adopt that position, and whether it extends to service units beyond the reserved quantity. An answer either way is useful: it bounds the City's exposure, or it puts a current position on the record rather than one taken in 2023.
Driver of the 2026 rate increase
The March 2026 Wastewater Impact Fee study lists the specific capital projects the updated rate is designed to fund. One of them serves this development directly:
The project detail sheet states the driver plainly: "This project is primarily driven by the proposed SMART development and extends service to the HC-04 subbasin." So the cost of serving this development is inside the fee now being adopted.
How the $11,161 was calculated, and what it assumes
Table ES-3 of the study sets out the arithmetic:
| 2026 Wastewater Impact Fee calculation | Amount |
|---|---|
| Total eligible capital improvement costs | $568,158,364 |
| Recoverable costs for impact fee planning period | $335,386,773 |
| Credit for utility revenue | ($39,897,575) |
| Total eligible impact fee costs | $295,489,198 |
| Growth in service units, 2025 to 2035 | 26,475 |
| Maximum allowable impact fee per service unit | $11,161 |
Service units are projected to rise from 34,348 in 2025 to 60,823 in 2035, a compound annual growth rate of 5.88 percent, and the 26,475-unit difference is the denominator.
Neither study mentions the development agreement, frozen rates, or grandfathering anywhere. That is not an error. Chapter 395 prescribes a maximum allowable fee computed as eligible cost divided by service units, and the study performs that calculation correctly. It is not asked to model what the City will actually collect. The consequence is simply that no document in the record sets the adopted rate against projected actual recovery.
The City confirmed this in writing on August 28, 2026. Asked whether the record contains any analysis of projected actual recovery as distinct from the maximum allowable fee, Assistant Director of Engineering Richard Reynosa responded that the method determines "the maximum allowable fee based on projected costs and growth over the next 10 years," and that "actual recovery or agreements made are not factors accounted for in order to provide an equal and proportionate assessment of the fee." Asked separately whether the City maintains an inventory of contractual rate commitments and has estimated their long-term cost, the response was: "There is not an inventory of these contractual rate commitments." So the gap described above is not merely unpublished. It has not been calculated, and the City does not hold the list of agreements that would be needed to calculate it, here or anywhere else in the system.
One methodological note worth flagging. The study converts connections to service units by meter size (Table 2-2), while Code Schedule 1 converts by calculated peak water flow. Those are different methods, and whether they reconcile is not addressed in the study. It may be nothing more than the difference between aggregate planning and individual assessment.
Funding the gap
Impact fees are one of the primary funding sources for growth-driven infrastructure such as the SMART Development Gravity Main. A shortfall between the fee collected and the study's cost basis doesn't eliminate the need to build the infrastructure. Under standard municipal utility financing, such a gap is typically covered by some combination of:
- Existing utility ratepayers, through water/sewer bills
- City debt (bonds), repaid over years by the utility system as a whole
- General utility revenue that could otherwise fund other system needs or rate relief
This page does not have documentation showing which of these the City intends to use - that would require the City's specific CIP funding/financing plan, which wasn't in the records reviewed here.
Caveats
- Both the methodology and the 2,108 figure are now sourced to primary documents. The conversion method (Secs. 86.294, 86.297, 86.298 and 86.299) has been read out of the City Code. The 2,108 LUE figure and the fee freeze have been read out of the executed development agreement itself, at Sections 1.07.D.3 and 1.05.A.3 respectively, replacing the earlier reliance on a summary. The executed PDF held in this project's records has no text layer, so those provisions were read from the page images rather than extracted as text.
- The pipeline LUE estimates are demand-based, not fixture-count based. Sec. 86.299 computes LUEs from a plumbing fixture count, not from average daily demand. The estimates above convert stated gpd figures to gpm and read Schedule 1, which establishes order of magnitude but is not the calculation the City would perform. RFI water and wastewater figures are also company-stated projections at the inquiry stage, and several projects state figures for a first phase only.
- The ordinance text has an illegible fraction. The copy of Sec. 86.294 obtained through public information request renders the residential meter size as "[fraction]-inch" in both places it appears. The 0.41 gpm peak-demand basis is legible and is the operative number.
- The City's own cost report has an internal inconsistency. The itemized cost sheet for the SMART Development Gravity Main project (in the March 2026 report) totals $9,631,500 on its own line-item math, while the report's summary table lists the same project at $24,078,600 in three separate places. The same mismatch appears on an adjacent project's detail sheet, suggesting a row-reference/formatting error in how the source PDF was assembled - not something resolvable from the document alone. This page uses the $24,078,600 summary-table figure, which is corroborated in multiple places.
- The 2026 rate schedule has passed one reading of two, and is not yet adopted. Ordinance 2026-29 passed first reading 6–1 on August 5, 2026, with the second reading set for September 1, 2026 and a proposed effective date of October 1, 2026. Council explicitly left amendments, credits and possible tiering open before the second reading, so the final adopted numbers could differ from the $14,519 and $11,161 figures used on this page.