City Council
Staff Report
From: City Manager
Report Type: ACTION ITEMS
Lead Department: Planning and Development Services
Meeting Date: November 18, 2024
Report #:2410-3732
TITLE
FIRST READING: Adoption of an Ordinance Amending the Municipal Fee Schedule to Modify the Calculation for Park, Community Center and Library Development Impact Fees From a per Unit to per Square Feet Basis for Residential Development. CEQA Status: Exempt Pursuant to 15061(b)(3).
RECOMMENDATION
Staff recommends that City Council:
1. Review the attached Supplement to the Development Impact Fee Justification Study (Attachment A); and
2. Adopt an ordinance amending the City’s FY2025 Adopted Municipal Fee Schedule to update the Parks, Community Center, and Library impact fees from a per unit to per square feet basis for residential development (Attachment B).
EXECUTIVE SUMMARY
Based on prior Council direction, staff recommends that the City Council adopt an ordinance amending the FY2025 Municipal Fee Schedule to modify the calculation of Park, Community Center, and Library Development Impact Fees for residential development from a per dwelling unit basis to a per square foot basis. This change is in response to Assembly Bill (AB) 602, which mandates that impact fees be charged on a square footage basis, unless the City makes specified findings explaining why square footage is not an appropriate metric. This amendment aligns with the City’s newly certified Housing Element and addresses Program 3.1: Fee Waivers and Adjustments, aimed at balancing the need for public facility funding with the promotion of housing affordability. The new fee structure, if adopted, would take effect in early 2025.
On September 23, 2024, this report was pulled from the City Council consent calendar by Councilmembers Lythcott-Haims, Veenker, and Mayor Stone based in part on public written comments received prior to the meeting (Attachment C). The report has been updated to provide additional context and a modified staff recommendation.
BACKGROUND
Under the Mitigation Fee Act (AB 1600), cities can charge new development for its relative share of the cost to fund the acquisition of land and improvements to public facilities. These fees are established based on the nexus between impacts caused by new development and the improvements needed to mitigate those impacts that would be funded by the established fee.
In 2020, the Community Services Department retained DTA, formerly David Taussig & Associates, to prepare a nexus study to update the Parks, Community Center, and Library Impact Fees. The initial study1 was implemented in August 2021, and in May 2022, DTA prepared and presented a supplemental analysis2 to address several policy items based on Finance Committee’s request. This included direction to update the fees from the initial analysis to address new legislation, AB 602, which came into effect in January 2022. AB 602 was designed to provide new statewide requirements for local jurisdictions seeking to impose development impact fees and articulated additional guidance on how local agencies comply with their impact fee obligations.
In June 20223, Council directed staff to convert residential Parks, Community Center, and Library Impact Fees from the existing per unit basis, to a per square foot basis. The current report and staff recommendations respond to the specific, discrete direction provided by Council on that date.
In February 2024, the Planning and Development Services Department engaged DTA to prepare the conversion analysis.
In April 2024, the Supreme Court of the United States issued an opinion in Sheetz v. County of El Dorado, California, applying the “unconstitutional conditions doctrine“ to development impact fees, creating some uncertainty over the level of scrutiny courts will apply to such fees going forward.
ANALYSIS
Prior to the initial nexus study that was implemented in August 2021, the City’s Park, Community Center, and Library Development Impact fees had not been updated since their inception in 2001. As a result of the updated nexus study and Council adopted fee levels, beginning FY2022, Palo Alto developments were subject to a substantial increase in the Parks Impact Fee driven by the current fair market value of land as well as comparatively modest increases to the Community Center and Library Impact Fees (Table 1). 1 https://www.cityofpaloalto.org/files/assets/public/v/1/agendas-minutes-reports/reports/city-manager-reports- cmrs/year-archive/2021/id-12163.pdf
2 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/finance- committee/2022/20220503/20220503pfcslinked.pdf
3 https://www.cityofpaloalto.org/files/assets/public/v/6/agendas-minutes-reports/agendas-minutes/city-council- agendas-minutes/2022/20220613/20220613pccsm-final-amended-linked.pdf#page=53 Table 1: Impact of Initial Nexus Study on Development Impact Fees - FY2021 vs FY2022 Year Residential Land Use
Type
Parks
(Per Unit)
Community
Center (Per Unit)
Library
(Per Unit) Total
Single-Family $ 13,103 $ 3,499 $ 1,187 $ 17,789 Single-Family > 3,000 SF $ 19,565 $ 5,086 $ 1,766 $ 26,417 Multi-Family ≤ 900 SF $ 4,337 $ 1,128 $ 390 $ 5,855 FY2020 -
2021
Multi-Family > 900 SF $ 8,577 $ 2,235 $ 710 $ 11,522 Single-Family per unit $ 57,420 $ 4,438 $ 2,645 $ 64,503 FY2021 - 2022 Multi-Family per unit $ 42,468 $ 3,283 $ 1,956 $ 47,707 Source: City of Palo Alto, FY2021 and FY2022 Municipal Fee Schedule Conversion of residential impact fees aligns with AB 602 and the relative impacts of new residential development more proportionately based on development size rather than a single amount per dwelling unit, regardless of size. For further details on the nexus study methodology and guidance on AB 602, refer to Attachment A: Second Supplement to the Development Impact Fee Justification – Assembly Bill (“AB”) 602 Compliance.
Using Palo Alto’s building permit data from 2013 to 2024, DTA calculated the average residential square footage for single-family and multi-family residential units constructed in the Palo Alto within the last 11 years. The average square footage per single-family and multi-family unit was determined to be 3,602 and 1,124 square feet, respectively. Based on these average unit sizes, DTA converted the existing Park, Community Center, and Library Impact Fee from a per unit to per residential square foot fee.
Table 2: FY2025 Council-Approved Development Impact Fees – Current Fees Current Fees Parks Community
Center Library Total
Single-Family (Per Unit) $ 67,650 $ 5,229 $ 3,116 $ 75,995 Multi-Family (Per Unit) $ 50,034 $ 3,868 $ 2,304 $ 56,206 DTA’s analysis resulted in two frameworks for implementation – distinct rates and a consolidated rate. Staff recommend the distinct rates, however, as a more accurate and equitable reflection of impacts caused by new development.
A distinct residential fee structure for single-family and multi-family fees is generally used when (1) there is sufficient building permit data available and (2) a jurisdiction can anticipate the number of projected units per residential land use type. When a jurisdiction has sufficient data available, the distinct fee structure is preferred because it more proportionately reflects the size and impact of the residential units. Table 3 provides the recommended fees in this framework as well as sample impact fees based on residential land use type and square footage.
Table 3: Framework 1 – Distinct Rates and Sample Impact Fees Distinct Fees Parks Community
Center Library Total
Single Family (Per SF) $ 18.78 $ 1.45 $ 0.87 $ 21.10 3000 $ 56,340.00 $ 4,350.00 $ 2,610.00 $ 63,300.00 3602 $ 67,645.56 $ 5,222.90 $ 3,133.74 $ 76,002.20 4000 $ 75,120.00 $ 5,800.00 $ 3,480.00 $ 84,400.00 Multi-Family (Per SF) $ 44.50 $ 3.44 $ 2.05 $ 49.99 850 $ 37,825.00 $ 2,924.00 $ 1,742.50 $ 42,491.50 1124 $ 50,018.00 $ 3,866.56 $ 2,304.20 $ 56,188.76 1400 $ 62,300.00 $ 4,816.00 $ 2,870.00 $ 69,986.00 A single consolidated residential fee structure is generally used when (1) a jurisdiction may not have sufficient building permit data or (2) may not be able to project the type of future development. Table 4 illustrates what a fee could be in this framework as well as sample impact fees based on residential square footage. This structure decreases the fee paid by the typical multi-family unit and increases the fee paid by the typical single-family unit.
Table 4: Framework 2 – Consolidated Rate and Sample Impact Fees Consolidated Fees Parks Community
Center Library Total
Residential (Per SF) $ 22.68 $ 1.75 $ 1.04 $ 25.47 850 $ 19,278.00 $ 1,487.50 $ 884.00 $ 21,649.50 1124 $ 25,492.32 $ 1,967.00 $ 1,168.96 $ 28,628.28 2000 $ 45,360.00 $ 3,500.00 $ 2,080.00 $ 50,940.00 3602 $ 81,693.36 $ 6,303.50 $ 3,746.08 $ 91,742.94 4000 $ 90,720.00 $ 7,000.00 $ 4,160.00 $ 101,880.00 Staff recommends implementation of the Parks, Community Center, and Library Impact Fees using the distinct rate fee structure because this framework more proportionately reflects the size and impact of the land use type and is in further compliance with AB 602. The intent of AB 602 is to ensure that impact fees are more proportional to the size of new development and distinguishing the rates by land use type allows for a more precise assessment of impact fees.
Notably, both frameworks will lower the fees for smaller developments regardless of land use type.
As noted in the City’s newly certified Housing Element4, high fees can impede housing production by increasing the per unit cost of development, impacting projected returns and 4 https://paloaltohousingelement.com/wp-content/uploads/2024/07/Palo-Alto-Housing-Element-6.pdf potentially discouraging new home building. Conversion of this fee will complete one of the objectives under Program 3.1: Fee Waivers and Adjustments in the Housing Element.
Subsequently, as part of the Housing Element program implementation, the City will be preparing an economic feasibility study to analyze implications that all development impact fees may have on housing production. These fees will be included in the assessment, and based on the study, Council may adjust fees and/or development standards to enable a reasonable return on investment and ensure sufficient fee collection to support City services.
Response to Public Comments
Since the initial publication of this report in September, the City Council received correspondence expressing concern about the recommended fee schedule and ordinance (Attachment C). In summary, the letters assert:
•The recommended action is a positive step in the right direction but the proposed fee structure disproportionately affects smaller housing units such as apartments and ADUs compared to larger single-family homes.
•High impact fees could deter the production of housing, particularly multi-family units, which are already disadvantaged under the current and proposed systems. •The staff report is unclear about the treatment of ADUs, home additions, demolitions, and basements under the revised fee structure.
•The report fails to include adequate data to assess policy impacts and lacks detailed information on past and future allocation of impact fee revenues. •The Council should consider excluding the first 750 square feet of all housing types from fee calculations, enhancing transparency regarding the use of impact fees, and offering refunds for fees previously assessed.
•The attached letter from Grubb Properties further illustrates that an 850-square-foot rental unit would pay the same fee as a much larger 2,014-square-foot single-family home and asserts this disparity inequitable and counter to the goals of AB 602, which aims to make impact fees fair and proportional.
Staff disagrees that the proposed fee structure (with distinct fees) disproportionately and inequitably affects smaller housing units such as apartments. Development impact fees are charged to offset the impacts created by new residents on City resources. The combined fee structure assumes that all types of housing have the same population density per square foot.
In other words, it assumes that a 1,500 square foot single-family home and a 1,500 square foot apartment will house the same number of residents. Alternatively, it assumes that a 4,500 square foot single-family home will house three times the number of residents as a 1,500 square foot apartment. Because, in fact, apartments will typically house more residents in the same square footage, it is more equitable to charge distinct fees to multi-family and single- family development. The distinct fees recommended by staff are based on the consultant’s analysis of average unit and household sizes.
Similarly, because development impact fees are charged to offset the impacts of new residents, they are not charged to renovations or replacement of existing units. While there may be cases where a renovation or replacement does result in new residents, the current nexus study does not support application of impact fees to these situations. Should the Council desire to explore application of impact fees to renovations and replacements, it could direct staff to initiate a new nexus study that calculates fees on a per-bedroom basis. While this would be a departure from the per-square foot scheme set forth in AB 602, staff believe the Council could make the required findings to adopt this alternative measure of impact.
Development impact fees are not collected for ADUs containing 750 square feet or less. For larger ADUs, the recommendation in this report applies the per square foot feet fee, which is preferrable to the current approach which applies a fee based on the size of the ADU compared to the primary residence. The average size of permitted ADUs in Palo Alto for 2024 is approximately 565 square feet.
With respect to other suggestions in the public comment, such as fee refunds and charging fees below the level authorized in the nexus study, staff would defer to Council for guidance. Staff acknowledges more work, analysis, and policy recommendations are needed to assess the development impact fee structure for residential development.
In fact, this work is scheduled to begin next calendar year. Consistent with the City’s certified Housing Element Program 3.1B the City will prepare an economic feasibility study to analyze implications that development impact fees, may have on housing production and adjust fees or development standards as appropriate to enable a reasonable return on investment and ensure sufficient fee collection to support City services.
Finally, the City Council does have the option of imposing a lower fee for multi-family housing development in this action while staff initiates a more comprehensive analysis as described above. The concern, however, about lowering the fee is that the City does not collect sufficient revenue to support further park, community center, and library services needs for an increasing population. This concern may be somewhat mitigated depending on how many permits for new home construction are permitted over the intervening period and how timely the updated fee study can be completed.
FISCAL/RESOURCE IMPACT
Development impact fees provide funding for capital improvements in parks, community facilities, and libraries to mitigate the impacts of new development in the community.
Revenues fluctuate each year based on the amount of residential and non-residential development occurring in Palo Alto. Currently, staff and DTA are not able to forecast revenue impacts due to the variability of development and changing economic conditions. DTA has provided an illustrative example using last fiscal year’s permitting data to demonstrate the financial impact of the fee conversion. The transition to the recommended fee structure may result in decreased revenue for the parks, community facilities, and library impact fees as smaller multi-family units are built but this too could be offset in part with greater housing density in multi-family projects.
Table 5: Estimated Revenue Calculation – Current Fee Schedule Table 6: Estimated Revenue Calculation – AB 602 Compliant Fee
POLICY IMPLICATIONS
City Council has the authority to charge new development for its relative share of the cost of specific public facilities, as calculated based on a nexus study and pursuant to state law requirements. Council also has the authority to restructure fees based on articulated City policies within legal limits and economic feasibility. The information provided in this report Fee Category Land Use Type Proposed Fee per Unit Total Est. Revenues1 Park SFD $67,650.00 $1,353,000.00Community Center SFD $5,229.00 $104,580.00Library SFD $3,116.00 $62,320.00Total SFR2 $1,519,900.00Park MFD $50,034.00 $0.00Community Center MFD $3,868.00 $0.00Library MFD $2,304.00 $0.00Total MFR3 $0.00$1,519,900.00Notes:1. Estimate, subject to change based on actual new development that occurs in FY 2024-25.2. Assumes approximately 20 new single-family residential units in FY 2023-24.3. Based on actual number of new multi-family units in FY 2023-24; however, these figures are for illustrative purposes only, as the City anticipates that MFD will increase in future fiscal years and subsequently, the revenues for multi-family development.
Total Estimated Residential Revenues
Fee Category Land Use Type Proposed Fee per Sq. Ft. Total Est. Revenues1 Park SFD $18.78 $699,273.30Community Center SFD $1.45 $53,990.75Library SFD $0.87 $32,394.45Total SFR2 $785,658.50Park MFD $44.50 $0.00Community Center MFD $3.44 $0.00Library MFD $2.05 $0.00Total MFR3 $0.00$785,658.50Notes:1. Estimate, subject to change based on actual new development that occurs in FY 2024-25.2. Assumes approximately 37,235 square feet of new single-family residential development occurred in FY 2023-24.
Total Estimated Residential Revenues
3. Based on actual number of new multi-family square footage in FY 2023-24; however, these figures are for illustrative purposes only, as the City anticipates that MFD will increase in future fiscal years and subsequently, the revenues for multi-family development. allows Council to evaluate and adjust the City’s Development Impact Fees for Parks, Community Centers, and Libraries.
Based on Government Code §66017, new or increased development impact fees go into effect no sooner than 60 days after adoption. Should Council adopt the recommended fee conversion, these fees are expected to be effective on January 18, 2025.
STAKEHOLDER ENGAGEMENT
The Community Services Department presented the initial nexus study and supplemental report for review to the Parks and Recreation Commission and Finance Committee between December 2020 and May 2022. On June 13, 2022, Council directed supplemental work related to the conversion of fees outlined in this report.
ENVIRONMENTAL REVIEW
The recommended actions are not considered a project as defined by the California Environmental Quality Act pursuant to CEQA regulation 15061(b)(3). The projects in the original 2021 nexus study associated with these fees have been fully analyzed as part of City’s 2030 Comprehensive Plan and its Environmental Impact Report as well as the City’s Parks and Open Space Master Plan and its Mitigated Negative Declaration; no further CEQA analysis is necessary.
ATTACHMENTS
Attachment A: Second Supplement to the Development Impact Fee Justification – Assembly Bill (“AB”) 602 Compliance
Attachment B: Ordinance of the Council of the City of Palo Alto Amending the Fiscal Year 2025 Municipal Fee Schedule to Transition Certain Development Impact Fees from Per-Unit to Per- Square Foot Fees
Attachment C: Correspondence
APPROVED BY:
Jonathan Lait, Planning and Development Services Director