Cotati City Council
Agenda Staff Report
Item type: REGULAR CALENDAR (ACTION)
To: City Council
Subject: APPROVAL OF RESOLUTIONS TO ELIMINATE
DEVELOPMENT IMPACT FEES FOR DEED RESTRICTED
AFFORDABLE UNITS IN INCLUSIONARY MULTIFAMILY
DEVELOPMENTS, HIGH-QUALITY LODGING PROJECTS
AND ASSOCIATED DEVELOPMENT IMPACT FEE POLICIES
Date: August 26, 2025
Written by: Damien O'Bid, City Manager
Recommendation
It is recommended that the City Council adopt resolutions 1) eliminating development impact fees for certain types of lodging, 2) eliminating development impact fees for deed restricted affordable units in multi-family inclusionary projects, subject to funding availability, and 3) clarifying policies for the application of development impact fees generally.
Background
California Government Code 66000, part of the Mitigation Fee Act, was enacted in 1987 to regulate the imposition and use of development impact fees by local agencies. More broadly, there has been a long history in California of ensuring that new development funds the public infrastructure needed to accommodate the growth and not shift the cost of those improvements to existing residents. Development impact fees are the tool to accomplish that, particularly off-site public infrastructure where the development is one of many contributors to cumulative impacts, as a local agency grows in accordance with its General Plan.
On August 12, 2025, the City Council became the first jurisdiction in Sonoma County to adopt development impact fees based on square footage, rather than by unit. When these fees go into effect on October 13, 2025, aside from regular building permit fees, the City will assess the following fees/taxes on new development:
• Affordable Housing In-Lieu Fee (for developments with 9 or less units, otherwise the development is required to include 15% of units as deed restricted affordable) • Bed Tax
• Linkage Fee (Only applicable to commercial, industrial, retail developments) • Parks and Recreation Fee (Charged on residential developments to the extent that the required park area is not provided in the development)
• Traffic Impact Fee (TIF)
• Sewer Connection Fee
• Water Connection Fee
• Water Conservation Fee
• Fire Impact Fee (A City fee established on behalf of the Rancho Adobe Fire District) Additionally, most residential and commercial developments are required to pay School Impact Fees to the Cotati-Rohnert Park School District.
At the August 12, 2025 public hearing, the City Council also reviewed policy options to reduce or eliminate development impact fees (DIFs) for affordable housing and high-quality lodging. In summary, the City Council requested that staff return within 60 days with developed policies, with the following feedback on the policy options that were presented:
- Affordable Housing
o How are DIFs calculated with expansions/renovations of existing buildings? o Preference for eliminating DIFs by policy for deed restricted affordable units in inclusionary multifamily developments.
o A cap of a 1,500 square foot unit size for DIF elimination. o Provide DIF elimination assurance at time of entitlement, provide 24 months (subject to discussion with housing developers) to pull a building permit. If the building permits are not pulled for the affordable units, this assurance expires and is only extendable by the City Council.
o Provide a 3-year sunset on the affordable housing DIF elimination to check in on the effectiveness of the policy.
- Lodging
o Analyze the payback time horizon and total estimated cost for lodging with DIFs eliminated.
Analysis/Discussion
The following is a summary of draft policies developed for DIFs organized by resolution Elimination of Impact Fees for Deed Restricted Affordable Housing in Inclusionary MultiFamily Development Over a Three-Year Pilot Term.
Based on City Council feedback that multi-family development has been more difficult to build than single family housing, this policy only applies to multifamily inclusionary development.
Units must be deed restricted, fulfill a part of the City‘s outstanding RHNA requirement and only apply to the City‘s inclusionary requirement (15%, rounded) to preserve available backfill funding. Multifamily development of 10 units or more was selected as the lower threshold because developments with 9 units or less can ”fee out” rather than building affordable units. To avoid subsidizing overly large units, the DIF elimination is capped at 1,500 square feet of conditioned space. Lastly, the DIF elimination assurance would be tied to entitlement and run for 24 months, concurrent with the term of the entitlement.
Staff will report out annually on the program success and the policy would expire in three years unless extended by the City Council. Given the limited funding currently available for this program, if adopted by the City Council, staff will also further explore options to increase funding to the inclusionary housing and/or linkage funds and return to the City Council to discuss options.
Targeted Development Impact Fee Elimination for High Quality Lodging Projects As part of a comprehensive economic development strategy, the City has been seeking to bring in high quality lodging options for visitors to Cotati, as overnight lodging brings visitors into the community that support local businesses, helps diversify the economy and supports local services and infrastructure through incremental increases in sales and property taxes as well as a local transient occupancy tax (TOT).
The City of Cotati is the only city in Sonoma County with no overnight lodging options or TOT revenue and given the economic imperative to diversify revenue sources and continue to grow revenue to provide high quality services and infrastructure for our residents, staff explored options to incentivize the construction of quality lodging through the impact fee program.
Based on these considerations and feedback from the City Council, the DIF elimination targets only high-quality lodging projects, as defined as 3 diamond equivalent or better by the American Automobile Association (AAA), attached to the resolution. Lodging projects, if built, will not pay City impact fees but will also create a new on-going General Fund revenue source for community infrastructure and services. In the early years of operation, this new revenue is proposed to backfill the impact fee revenue that was eliminated to make the impact fee funds ”whole”. This would be accomplished through an internal loan, structured and approved by the City Council prior to occupancy.
Only lodging projects with 25 rooms or more would be eligible, primarily to avoid home conversions and ensure adequate TOT to backfill the eliminated DIFs in a timely manner.
Exempting Development Impact Fees on Certain Development Activities and Provide General Guidelines
At the August 12, 2025 City Council meeting, the City Council asked how the new DIFs applied to renovations or expansions of existing structures.
Currently, most of the City's DIFs are charged by the unit, so the size of the unit is not typically material to the impact fees collected. However, with the change across most fees to a square foot-based fee (first jurisdiction to do this in Sonoma County), it raises new questions of applicability. Given that the City is the first jurisdiction in Sonoma County to move to a square foot based DIF, there are no direct examples to follow. However, staff was able to find two parallel examples in Sonoma County; one in Santa Rosa and one with the Cotati Rohnert Park Unified School District (CRPUSD).
For existing permitted residential units, Santa Rosa does not charge DIFs for expansions up to 400 square feet. The CRPUSD does not charge school impact fees for expansions up to 500 square feet.
The intent behind both policies is that it allows a homeowner to build a new space for a new child or elderly parent, or any other reason, without the added cost of paying impact fees. The square footage is based on permitting experience, intended to allow for adding a new bedroom, expanding a kitchen, etc without triggering impact fee payments for relatively small expansions.
Additionally, under State Law, Junior or Accessory Dwelling Units up to 750 square feet are not required to pay DIFs to encourage this type of development.
The policy proposes a 5-year period where impact fees would not apply, simply because most home renovations would not extend over this long of a time period, but short enough that it would be relatively easy for staff to verify.
Under this policy, nonresidential development can alter, remodel or reconstruct a building, as long as it doesn’t increase the gross floor area previously approved. DIF’s would apply to any increase in gross floor area.
Finally, the policy includes some general clarifications around prior payment of DIFs and the ability for review of special cases, if presented by the developer. These policies are parallel to existing policy in Santa Rosa.
Financial Considerations
The recommendations proposed are cost neutral to the impact fee funds.
Lodging
The impact fee elimination for certain hotel projects would be repaid by TOT revenues through an internal loan over time, typically within 5 years of project occupancy.
As requested by the City Council, staff reviewed the equivalent DIF and payback time for the Cotati Hotel. The combined square footage of the market hall and hotel is approximately 85,000 square feet, which equates to a combined total impact fee of approximately $2.2M.
To calculate the expected TOT revenue, staff pulled data from the development proposal and also reviewed current data from Sonoma County Tourism (SCT). It is expected that the first 3 years of the hotel operations will be the ”ramp up” phase, followed by two years of ”stabilization”. By year 6, the hotel is generally considered stabilized.
Based on the latest data from SCT, as of July 2025, overall occupancies were at 68.8% and the average daily rate was $227.93. Both have been higher in the 5-year prior trend, as this industry is cyclical, but hotel growth forecasts in the United States are lower at this time. Based on data provided as described above, the following TOT projection was developed:
Based on this, the equivalent DIF revenue could be recovered during the 3rd year of operation.
Although the Cotati Hotel is expected to be a higher end product, to be more conservative, if the ADR is at a flat $228 (current countywide average ADR), the equivalent TOT revenue would be collected by the end of the 3rd year of operation, as indicated below:
Affordable Housing
For affordable housing impact fee elimination or reductions, the lost revenue would be made up through a transfer of funds from the Inclusionary Housing and Linkage Funds. As of July 1, 2025, these funds have an estimated current balance available of approximately $895K and $330k, respectively. Additionally, each year, the Inclusionary Housing Fund receives approximately $66k in interfund loan payments and interest on the existing loan schedule. If the Inclusionary Housing Fund were to call the interfund loan debt owed as well as sell the land held for redevelopment to affordable housing (120 East Cotati Avenue) at market value, there could be an additional $2.36M in funds available for impact fee reductions (approximately $3.6M).
However, calling the interfund loan with the Sewer Enterprise is not a near term option, but some restructuring or acceleration may be an option. The sale of 120 East Cotati Avenue is unknown, but is expected to be determined as part of development agreement discussions this calendar year. Regardless of the balance, if these funds become depleted, this proposed program would no longer be available until the funds were replenished.
In general, most of the entitled residential developments are SB 330 projects, meaning that all City fees were ”frozen” at the time the application was deemed complete. This includes Redwood Row, Cotati Village 1 and Cotati Village 2, which will see no cost changes as a result of the updated impact fees. New development will be subject to the new impact fee schedule, which will go into effect 60 days after adoption. It is proposed that any policy changes to the impact fees would go into effect concurrently with the new fee schedule. This would include any project that has qualified under SB 330.
Lastly, based on prior commitments in the current Housing Element, approximately $150-$200k in Inclusionary Housing Funds would need to be committed to fulfill these obligations.
Therefore, for planning purposes, it is expected that the combined funds available in the Inclusionary Housing and Linkage Funds of $1.0M, as of July 1, 2025.
Based on the protypes used in the Nexus Study fee comparison, using the multifamily prototype (1,000 square feet), if all impact fees are set to zero it would eliminate impact fees on approximately 37 deed restricted affordable units.
If entitled units are excluded from the RHNA requirements (because they have not pulled a building permit yet), there are 125 units remaining in the City‘s RHNA affordable housing allocation.
Environmental Issues
Where it can be determined with certainty that there is no possibility that the activity in question may have a significant effect on the environment, the activity is not subject to CEQA review.
This general rule can be applied to activities which could be subject to the CEQA process, but which logic dictates should not be subject to CEQA review. Therefore, based on the information provided above, the proposed resolution is exempt from CEQA pursuant to Section 14.03.021 of the CEQA Guidelines in that there is no possibility that the activity may have a significant impact on the environment.