The Mitigation Fee Act (Government Code Section 66000) authorizes local governments to impose fees on new development provided that a nexus be shown between the fee that is charged and the impact of the new development. Local jurisdictions use impact fees to fund affordable housing in two primary ways: 1) through fees imposed on new market-rate residential projects, typically called housing impact fees; and 2) through fees imposed on new commercial development, typically called commercial linkage fees. Funds collected through housing impact and linkage fees are typically deposited into a housing trust fund. As with all fees imposed under the Mitigation Fee Act, a nexus study must be completed in order to justify the imposition of the fee. Linkage fees and housing impact fees are most typically assessed on a per square foot basis, as opposed to the per unit basis often used for inclusionary housing in-lieu fees.
The justification for imposing housing impact fees on new residential development is that new market-rate housing increases demand for goods and services in the community, which in turn creates new lower paid jobs and creates a need for housing affordable to lower-income households. Similarly, a nexus study for a commercial linkage fee would use an estimate of the number of jobs created by a new commercial development to establish the number of new housing units needed by new employees by income level.
In crafting a linkage fee or housing impact fee program, jurisdictions may consider thresholds, exemptions, and varying fee levels based on project size or type to ensure that certain uses and smaller projects are not discouraged or disproportionately burdened by fees. As is common with inclusionary housing programs, jurisdictions may choose to exempt small residential projects (i.e., five units or less). Exemption of certain uses such as public uses, schools, and childcare centers are also common. For commercial development, a threshold is often established based on square footage, whereby smaller projects are exempt. Many jurisdictions also base fee amounts on type of residential (i.e., single-family, condo, or rental) or commercial (i.e., office, retail, hotel) use.
Feasibility. A key challenge in the development of new impact fees is ensuring that the new fee will not result in the financial infeasibility of new development. According to a Terner Center for Housing Innovation report, cities frequently set fees well below what is justified in the corresponding nexus study. However, single-impact fees should not be considered in a vacuum, as projects are often subject to multiple other fees and exactions. Feasibility studies that consider the total financial impact of all fees can help ensure that new fees will not constrain development. To that end, linkage fees and housing impact fees may be less appropriate in jurisdictions where greenfield development is occurring, and impact fees related to the installation of new infrastructure are high. The Terner Center report noted that linkage fees and housing impact fees were most common in more urbanized communities where the majority of development occurring was on infill sites.
Market conditions. To a large extent, the success of a linkage fee program relies on good market conditions where significant private development is occurring. Naturally, fee revenues will be less in years when development has slowed. However, commercial linkage fees and housing impact fees provide a good opportunity to create a dedicated revenue source for a housing trust fund which can then be used toward a variety of affordable housing goals and programs. More information on housing trust funds and related programs can be found in the Housing Trust Fund section.
Relevant State Law
Government Code Section 66000. Mitigation Fee Act.
Assembly Bill No. 1483 (AB 1483) (2019), house data collecting and reporting, requires local jurisdictions to post fee schedules and nexus studies clearly online.
Resources
Terner Center for Housing Innovation. Residential Impact Fees in California: Current Practices and Policy Considerations to Improve Implementation of Fees Governed by the Mitigation Fee Act.
Inclusionary Housing. Commercial Linkage Fees.
Examples
21 Elements. Impact Fees and Inclusionary Housing. 21 Elements is a collaboration between all the local jurisdictions within San Mateo County in order to share information on housing policy and planning issues. As part of the project, a spreadsheet detailing the fee amounts and program characteristics for linkage and housing impact fees was compiled for cities within the county. The spreadsheet provides insight on various thresholds, exemptions, and fee amounts. Some jurisdictions only had a linkage fee for commercial development, while others imposed a fee on both residential and commercial development. Fee amounts ranged from $5 per square foot up to $42 per square foot, dependent on project type. The 21 Elements site also provides numerous examples of nexus studies and staff reports related to linkage fee approval.
City of Sacramento. Housing Impact Fee. The City of Sacramento adopted its housing impact fee in 2015. The City’s fee structure is intended to incentivize high-density development. The City also provides a lower fee rate for housing constructed within designated areas of the city, defined as census tracts where the average home sales price was less than or equal to $190,940 in 2015.