City Council
Staff Report
From: City Manager
Report Type: CONSENT CALENDAR
Lead Department: City Attorney’s Office
Meeting Date: September 8, 2025
Report #:2502-4222
TITLE
FIRST READING: Adoption of an Ordinance Amending Chapter 16.64 (Development Fee and In- Lieu Payment Administration) of Title 16 (Building Regulations) of the Palo Alto Municipal Code to Reflect Changes in Law. CEQA Status – Exempt under CEQA Guidelines Section 15061(b)(3).
RECOMMENDATION
Staff recommends that the Council adopt the attached ordinance amending Chapter 16.64 (Development Fee and In-Lieu Payment Administration) of Title 16 (Building Regulations) of the Palo Alto Municipal Code to facilitate additional analysis of development impact fees where requested by a project applicant.
BACKGROUND
The proposed ordinance updates the City's impact fee protest process to allow developers to challenge fees on constitutional grounds, ensuring fees are fairly linked to a project's impact, in addition to the existing process for legal challenges under state law.
Under the Mitigation Fee Act, California Gov. Code §§ 66000-66025, cities may charge the proponent of a new development project various development impact fees to offset the development’s relative share of the impacts created by new residents on City resources. To set the formula by which a development impact fee is calculated, a city must first conduct a nexus study to ensure that the fee schedule assigns to each development project its fair share of the costs of necessary improvements. The formula by which each impact fee is set is approved by the City Council, and the amount of the fee assessed on each project is calculated according to the Council-approved formula. The City regularly updates the nexus studies underlying its development impact fees.
Until recently, legislatively adopted development impact fees in California were governed principally by the Mitigation Fee Act, which requires that fees and exactions imposed on development bear a “reasonable relationship” to the impacts created by the development.
In Sheetz v. County of El Dorado, 601 U.S. 267 (2024), the United States Supreme Court held that in addition to the Mitigation Fee Act, legislatively adopted development impact fees must
also satisfy a test based in the Takings Clause of the Fifth Amendment. Under Sheetz, there must be an “essential nexus” between the exaction and purpose of the permit and “rough proportionality” between the amount of the exaction and the projected impact of the proposed development. This test (the “Nollan/Dolan test”) is derived from two U.S. Supreme Court cases, Nollan v. California Coastal Comm’n., 483 U.S. 825 (1987), and Dolan v. City of Tigard, 512 U.S. 374 (1994).
Under the Mitigation Fee Act, an applicant who believes a fee does not satisfy the statute’s “reasonable relationship” standard must pay the fees under protest and challenge the fee through an administrative mechanism provided by the City, with certain procedures dictated by the State statute. The City’s current impact fee protest procedures, found in PAMC Chapter
16.64, incorporate the Mitigation Fee Act’s payment-under-protest structure. They include procedures and standards that apply to challenges under the Mitigation Fee Act but are inapplicable to constitutional challenges.
ANALYSIS
Because the Nollan/Dolan standard did not apply to legislatively adopted development impact fees in California until Sheetz was decided, City’s current impact fee protest procedures do not contemplate constitutional challenges.
Staff now recommends that the City Council amend the Chapter 16.64’s protest provisions to address both protests under the Mitigation Fee Act and constitutional challenges to the City’s impact fees. With these adjustments, Chapter 16.64 will allow applicants who believe that the Council-adopted formula for impact fees does not satisfy the “essential nexus” and “rough proportionality” requirements with respect to their proposed project to request additional analysis of the impact of their proposed project and the appropriate fee. It will also make clear that certain requirements apply only to challenges under the Mitigation Fee Act, not to constitutional challenges. Amending Chapter 16.64 to accommodate requests for additional review on constitutional grounds will allow the City to learn of and potentially resolve a constitutional challenge to its impact fees before litigation is filed.
FISCAL/RESOURCE IMPACT
There is no anticipated fiscal or resource impact associated with this action. Preparation of additional analysis of a proposed project will be at the applicant’s expense.
STAKEHOLDER ENGAGEMENT
Staff from the City Attorney’s Office and Planning and Development Services have coordinated regarding the administration of this amended protest procedure.
ENVIRONMENTAL REVIEW
Council action on this item is exempt from CEQA review under section 15061(b)(3) of the CEQA Guidelines because it can be seen with certainty that there is no possibility that amending the City’s administrative appeal procedures for development impact fees may have a significant effect on the environment.
ATTACHMENTS
Attachment A: Ordinance Amending PAMC 16.64
APPROVED BY:
Molly Stump, City Attorney