Fremont City Council Meeting: 02/07/23 07:00 PM
3300 Capitol Avenue Div/Dept: Community Development
Fremont, CA 94538 Category: Fees & Rates
SCHEDULED
Sponsors:
COUNCIL STAFF REPORT (ID # 4783) DOC ID: 4783 A
Updated: 2/2/2023 11:17 PM by Susan Gauthier A Page 1
IMPACT FEE DEFERRAL - Report Back and Request for Direction on Impact Fee Deferral Policy for Market Rate Residential Development Projects Contact Persons:
Name: Dan Schoenholz Hans Larsen
Title: Community Development Director Public Works Director Div/Dept: Community Development Public Works
Phone: 510-494-4438 510-494-4722
E-Mail: [email protected] [email protected]
Executive Summary: At its December 6, 2022 meeting, Council approved a 13.65% increase in development impact fees effective July 1, 2023 to keep pace with increases in construction costs as measured by the Engineering News-Record’s Bay Area Construction Cost Index. In conjunction with the fee increase, Council directed staff to return to Council with information regarding potentially allowing market-rate housing developers to defer payment of impact fees. Council also requested that staff analyze the possibility of phasing in the 13.65% increase in six-month increments.
This report provides background regarding the City’s fee deferral program and includes a discussion of the potential consequences of restoring a fee deferral option for market-rate residential developments. Staff requests direction from Council on whether or not to initiate an ordinance revision to reinstate these fee deferrals.
Staff does not recommend phasing in the already-adopted 13.65% increase due to operational challenges that phasing would introduce.
BACKGROUND: Development impact fees are established under the Government Code Section 66000 et. seq., known as the Mitigation Fee Act. This act allows local agencies to establish fees to charge new development their fair share of the cost to expand or construct new public facilities to support this new development.
Fremont has five development impact fees, including: Traffic; Capital; Fire; Park Facilities; and Parkland, as described below:
• Traffic impact fees fund traffic facilities needed to serve new development, including intersection improvements, roadway segment improvements (distances between intersections), bicycle and pedestrian improvements (e.g., sidewalks, bike lanes), signal interconnect improvements (adjustments to signal timing as traffic patterns and intensity change), and general signal/intersection projects (i.e., conversion of non-signalized to signalized intersections when warranted). • Capital facilities fees fund the construction or purchase of buildings, land, and equipment that are part of the system of capital facilities serving new development (e.g., city administration, senior service facilities, police facilities, library service facilities).
• Fire facilities fees fund fire protection facilities in the form of buildings and equipment needed to serve new development.
Council Staff Report (ID # 4783) Meeting of February 7, 2023 Updated: 2/2/2023 11:17 PM by Susan Gauthier A Page 2
• Park facilities fees fund the initial facilities and improvements (e.g., play areas, restrooms, ball fields) at City parks.
• Parkland fees fund the acquisition of new parkland to maintain the City’s standard of five acres of parkland per 1,000 residents.
In addition, residential projects sometimes owe two additional fees that were not established under the Mitigation Fee Act but which are also potentially eligible for deferral:
• Art District Fees: There are four zoning districts that require payment of an art fee:
Downtown, City Center, Warm Springs Innovation, and Ardenwood Technology Park Planned District (PD-2015-23).
• Affordable Housing In-lieu Fees: Under the City’s Affordable Housing Ordinance, residential developers have the option to pay a fee toward off-site construction of affordable housing in-lieu of building on-site affordable housing.
Until 2009, the impact fee ordinance required payment of impact fees prior to building permit issuance. In 2009, in response to a slowdown in development activity due to the economic recession, Council approved an amendment to the development impact fee ordinance to allow deferral of fee payment up to 18 months after building permit issuance or prior to issuance of the certificate of occupancy, whichever came first.
In 2019, Council voted to eliminate the fee deferral option for market rate residential projects of two or more units. Reasons for the change included the fact that market rate residential development was exceeding Fremont’s target as established through the Regional Housing Needs Assessment (RHNA) process, suggesting deferral wasn’t needed to incentivize market rate projects; as well as recognition that the sooner the City received the fee payments, the sooner the funds could be used for fee-supported purposes. The deferral option was retained for affordable housing and for non-residential projects.
As part of the impact fee program, Council typically authorizes annual index-based adjustments to fees to reflect changes in the cost of providing public infrastructure. On December 6, 2022, Council considered an increase in impact fees of 13.65%, effective July 1, 2023. This proposed increase was the highest proposed annual adjustment on record due to unprecedented construction cost increases in the preceding year.
During the public hearing on the proposed increase, a speaker representing the Building Industry Association stated that the 13.65% increase would be difficult for developers to accommodate, and requested that Council reinstate the impact fee deferral for market rate residential developers as a way to help market-rate residential projects remain financially feasible.
As part of its adoption of the increase, Council directed staff to return with information regarding the pros and cons of restoring the fee deferral option. Council also asked for information regarding an option where the 13.65% increase would be gradually phased in rather than made effective in its entirety on July 1, 2023.
Council Staff Report (ID # 4783) Meeting of February 7, 2023 Updated: 2/2/2023 11:17 PM by Susan Gauthier A Page 3
DISCUSSION/ANALYSIS:
Fee Collections
The total amount of impact fees collected by the City (i.e. from residential and non- residential projects combined) over the past several years are shown below:
Fiscal Year Fees Collected No. of Projects Subject to Fees
2015/16 $23.3 million 232
2016/17 $46.6 million 450
2017/18 $37.2 million 278
2018/19 $43.4 million 240
2019/20 $66.3 million* 163
2020/21 $35.2 million 168
2021/22 $21.3 million 124
*Fee deferral option was eliminated for market rate residential projects on October 1, 2019.
Many factors feed into the amount of revenue collected. The number and type of projects permitted, fee levels (which go up over time due to indexed increases), and the rules in place at the time all affect impact fee payments. However, a reasonable interpretation of the City’s fee collection data is:
• revenues were strong and relatively steady from FY 2016/17 to FY 2018/19; • when the fee deferral option was eliminated on October 1, 2019, it resulted in a one- time surge in revenues as the City received both deferred fee payments from projects permitted in 2018 and non-deferred payments for projects permitted between October 1, 2019 and June 30, 2020;
• revenues subsequently diminished as deferred payments for market rate residential projects ended and as the number of construction projects subject to impact fees declined.
Analysis
The effect of restoring the fee deferral option is difficult to predict but likely would be mixed.
On the one hand, by collecting the fees later, the City would use the fees later for infrastructure/affordable housing, which would cost money in an environment of escalating construction costs such as that existing today. There would also be an opportunity cost associated with infrastructure not being able to be utilized as soon.
On the other hand, restoring fee deferrals will lower borrowing costs for residential development, which in some cases could be a deciding factor as to whether or not the Council Staff Report (ID # 4783) Meeting of February 7, 2023 Updated: 2/2/2023 11:17 PM by Susan Gauthier A Page 4
project is built. If the fee deferral resulted in more projects being built, it might result in greater total revenues, allowing for more infrastructure/affordable housing to be constructed.
Also, if the fee deferral resulted in more residential projects moving forward, it would assist the City in meeting its RHNA allocations for both market-rate and affordable units.
From an administrative standpoint, reinstating the fee deferral option for market rate residential development would be straightforward, as the systems are already in place for deferrals related to affordable housing and commercial projects.
Phased Increase
Staff also evaluated the option of phasing in the 13.65% increase in two or more increments. This option would provide a lesser amount of savings to developers and impose lesser opportunity costs to the City than reinstating the fee deferral. However, th is option would be considerably more administratively complex. During the phase-in period, it would essentially double the amount of staff time involved, as it would be a combination of paying fees at the time of permit and deferring fees until a later date. If the phased increase was a one-time approach rather than an ongoing policy, it would also require that all projects approved in FY 2023/24 be governed by unique rules compared to all other projects before and after, which would be difficult for staff to track and manage. Staff therefore does not recommend that Council pursue the phased payment option.
Process Moving Forward
Should Council opt to reinstate fee deferrals for market rate residential projects, staff would draft revisions to 18.290.070 of the Fremont Municipal Code. As with all proposed amendments to the Zoning Code, the Planning Commission would review the proposed language and make a recommendation to Council. Council would then consider the proposed language and the Commission’s recommendation before voting on the amendment. Staff anticipates that the process could be completed in time for the deferral option to go into effect on July 1, 2023 (the same date that the fee increase takes effect).
PUBLIC NOTICE: On January 24, 2023 , n otice of tonight's development impact fee discussion was sent to the 2,816 subscribers to the City’s Builders Interest List. The Builders Interest List is used to notify interested persons about construction and development service updates, development fees, policy and program changes, and related outreach efforts.
FISCAL IMPACT: As noted above, the impact of reinstatement of the fee deferral would result in a delay in fee collections, but overall fees would potentially increase if the deferral resulted in more projects being built.
ENVIRONMENTAL REVIEW: Direction from Council regarding the possible reinstatement of impact fee deferrals for market rate residential projects is exempt from the requirements of the California Environmental Quality Act (CEQA), without limitation,per CEQA Guidelines 15378(b)(2), (4) and/or (5) as a organizational, administrative and/or funding meachansms that do not result in any direct or indirect physical changes to the environment;, and.or ection 15061(b)(3) in that it is not a project that has the potential to cause a significant Council Staff Report (ID # 4783) Meeting of February 7, 2023 Updated: 2/2/2023 11:17 PM by Susan Gauthier A Page 5
effect on the environment. Each of the foregoing provides a separate and independent basis for CEQA exemption.
ATTACHMENTS: None.
RECOMMENDATION: Provide direction to staff regarding potentially reinstating impact fee deferrals for market rate residential projects.