The fees imposed by cities and counties for new residential development are important in covering the costs incurred for processing permits but also for funding of the infrastructure needed to serve the new development. Fees that are too high, however, may discourage or preclude housing development. Timing for the collection of fees is also an important factor.
Fees have become a mainstream method for local jurisdictions to cover the cost of staffing and infrastructure and services given limited sources of revenue. This has been especially true since the passage of Proposition 13 wherein local governments lost the ability to annually adjust property tax rates to meet the infrastructure and other needs of the community. Instead, property tax rates were essentially capped at the rates in effect at the time the proposition passed with only a minor annual adjustment (also capped) that is made by the County Assessor.
While local jurisdictions have the legal authority to charge fees for permit processing, those fees must be “reasonably necessary” to cover the cost of providing the services. For impact fees, the Mitigation Fee Act requires that these fees have a proportional nexus to the development that causes the need for the improvement.
Types of Fees
- Impact fees are charged to address impacts caused by new development and are a means to ensure that infrastructure needed to support new development is paid for by new development rather than the public at-large. These fees can include the cost of constructing public facilities (e.g., transportation improvements, parks (land and facilities), and new or expanded public buildings like fire stations or libraries that are needed to serve the new development).
- Environmental mitigation fees are another form of impact fee. Examples include fees for species habitat preservation (land) and loss of agricultural land (preserve other lands).
- Connection or demand fees pay for access to water and wastewater systems. These are a form of “buy-in” to existing systems that can be used to expand existing systems or to pay off the debt that the service provider has incurred for the previous construction of these facilities in anticipation of demand.
- Service/User fees are generally related to the cost of providing a service such as permitting fees (e.g., planning and building permit fees).
- Special District impact fees are typically outside the control of a city or county. These typically include school impact fees but may also include other independent special district fees (e.g., a fire protection or utility district).
- Finally, there are in-lieu fees. These are fees charged in lieu of the provision of a requirement. These types of fees can include inclusionary fees (a fee in lieu of providing affordable housing units) but can also include such things as childcare or public art fees. In-lieu fees are also typically used when a requirement results in a fraction of a unit or a fee that is too small by itself to generate a meaningful contribution to a goal but when aggregated with other in-lieu fees can achieve the desired result.
Reducing and/or deferring fees may act as an incentive for housing production, but fees must be balanced against the overall need for infrastructure and the likelihood of finding alternative funding sources to make up for any resulting shortfalls. A jurisdiction can extend fee reductions or waivers to preferred housing types (e.g., affordable housing, missing middle housing, accessory dwelling units) even before other funding resources are identified, but there must eventually be an accounting that shows how the shortfalls are replaced (e.g., grants, donations, other city revenues).
Impact fee deferral programs are one such best practice. Most impact fees are due prior to the issuance of a building permit because it is the simplest method to ensure payment. That said, developers put out a large sum of money to get to this stage (e.g., land costs, permitting, fees, etc.) and then need to secure financing for construction (materials and labor) long before they can sell or rent units. The cost of financing fees can place a tremendous burden on development and as such, fee deferral programs can provide significant relief. Typically, deferral programs allow fees to be deferred for a period sufficient to allow for construction (15-18 months) with required payment prior to finalizing the building permit (Certificate of Occupancy). Fee deferrals are typically secured by liens on the properties, so there is a fair amount of paperwork in preparing, recording, tracking, and ultimately releasing the liens. More detailed information about Impact Fees is included in the Funding and Financing section below.
Permitting fees are a different matter. As discussed elsewhere in this report, permit streamlining through objective design standards and ministerial reviews is one way that permit fee may be reduced in the form of reduced permit requirements or timeframes.
Fees can both hinder and facilitate new development. Valley stakeholders noted that excessive development impact fees can stall residential development projects, specifically affordable projects that serve underrepresented areas within the San Joaquin Valley. The high cost of permitting fees (especially when permitting duration is lengthy) also makes it difficult to build more affordable homes. Finally, it was noted that creating a diversity of housing types is challenging when costs are high.
Ironically, both impact fees and permitting fees support development activity. For example, in areas facing development moratoria because of the lack of adequate public facilities, impact fees may be viewed not as growth stopping measures, but rather as growth facilitators. Impact fees pay for the infrastructure needed to support the development and, in many cases, also act as mitigation to provide environmental clearance for projects. Without the impact fees, some projects would have to construct necessary infrastructure and improvements themselves or wait until they were built with other resources.
Additionally, permitting fees that are reasonably related to cost-of-service delivery should be widely accepted by the development community as adequate staffing can result in reduced permitting timeframes, especially when permitting processes are objective and efficient.
Fee reductions can create funding shortfalls. While impact fee reductions may be offered to preferred housing projects, jurisdictions must understand they are effectively subsidizing the fee reductions through other sources. Equally important is the fact that jurisdictions cannot pass the unfunded burden on to future development activity. As such, jurisdictions should be aware that they will need to find other sources of revenue or possibly use a transportation improvement grant to offset a traffic impact fee reduction or a land donation to offset a parkland acquisition fee reduction.
The survey asked city and county staff whether they have codified standards or policies that focus on streamlining efforts, such as standards and regulations pertaining to SB35. Only nine percent of the 33 respondents said their jurisdiction had either evaluated or updated regulations and policies to ensure efficient streaming of permitting and fee processes. Fifty-eight percent of respondents said they have not streamlined any of their processes, while 33 percent are currently in progress of some form of streamlining effort.
The primary challenge stakeholders voiced is that most permit processes for Valley communities are over-regulatory and burdensome. This type of regulatory environment has led to decreasing residential development, a lack of housing options, and frustration among the development community. Beyond the permitting processes, financial constraints tied to excessive impact fees have stalled multiple residential projects, specifically those that are affordable and serve underrepresented areas. Other comments included:
- High Costs for Developers. The high cost of construction materials, as well as permitting and fees, has made it difficult to build more affordable homes. Housing affordability is a top concern, and the diversity of housing types is challenging when costs are high.
- Streamline Permit Processing. Establish streamlined zoning and plan permit application processes.
- Permitting Delays: Several directors identified permitting delays as an impediment to housing.
- Permit Streamlining: Directors also observed that some local jurisdictions (e.g., Modesto, Turlock, Fresno) have been very successful at streamlining permitting processes to expedite housing construction.
Relevant State Law
Government Code Sections 66000 – 66008. Fees for Development Projects.
Government Code Section 66477. Parkland Dedication (Quimby Act).
Government Code Sections 66483 – 66484.9. Subdivision Fees for Utilities, Transportation, Groundwater Recharge.
Government Code Sections 65940 – 65945.7. Application Fees for Development Projects.
Assembly Bill (AB) 2132 grants cities and counties full authorization to set their own fees for permits. Therefore, cities and counties have the flexibility to set lower fees for preferred development project types, such as housing.
Assembly Bill No. 571 (AB 571) (2021), Affordable Housing: Density Bonus, prohibits a local government from charging affordable housing impact fees, including inclusionary zoning fees, public benefit fees, and in-lieu fees on deed-restricted affordable units that are part of a project eligible for a density bonus under Density Bonus Law (DBL).
Senate Bill No. 330 (SB 330) (2019), Housing Crisis Act of 2019, places restrictions on certain types of development standards and amends the Housing Accountability Act. Additionally, it requires changes to local approval processes and the Permit Streamlining Act, including those relating to development impact fees.
Assembly Bill No. 1483 (AB 1483) (2019), House Data: Collection and Reporting, requires a local agency or special district to maintain online a current schedule of fees, exactions, and affordability requirements imposed by the local agency to a proposed housing development project, all zoning ordinances and development standards, and annual fee reports or annual financial reports. The bill also requires local agencies to provide an online archive of impact fee nexus studies, cost of service studies, or equivalent, as specified.
Assembly Bill No. 3149 (AB 3149) (2020), Mitigation Fee Act, requires that a local agency hold at least one open and public meeting, with a 14-day advanced notice when increasing a fee or service charge.
Senate Bill No. 13 (SB 13) (2019), prohibits a local agency, special district, or water corporation from imposing any impact fee, as specified, upon the development of an accessory dwelling unit less than 750 square feet, and would require any impact fees to be charged for an accessory dwelling unit of 750 square feet or more to be proportional to the square footage of the primary dwelling unit.
Proposition 13 (1978) decreased property taxes by assessing properties at their 1976 value and restricted annual increases of assessed value to not exceed 2 percent per year. It also prohibited reassessment only in cases of change in ownership and completion of new construction.
Assembly Bill No. 2372 (AB 2372) (2014) provides that a change of ownership under Prop 13 is considered when 90 percent or more of the ownership interests transfer ownership in one or more transactions. This would apply to ownership interest sales made on or after January 2015.
Assembly Bill No. 602 (AB 602) (2021) requires: 1) local governments to update their nexus studies used to justify certain impact fees at least once every eight year’s 2) jurisdictions to base rate calculations on the square footage of individual units, unless the jurisdiction demonstrates that another metric is more appropriate; 3) large jurisdictions to incorporate capital improvement plans into their nexus studies; and 4) it adds additional public hearing requirements and requires local agencies to make additional findings supporting their fee calculations and address evidence challenging the validity of their findings.
Assembly Bill No. 879 (AB 879) (2017) requires that the Annual Report in the Housing element to include additional analysis of non-governmental and governmental constraints including locally adopted ordinances that impact the cost and supply of residential housing.
Local Housing Solutions. Reduced or waived fees for qualifying projects.
Terner Center for Housing Innovation, u This report provides an analysis of 40 jurisdictions’ impact fees and provided policies intended to improve housing supply and affordability.
Terner Center for Housing Innovation, The Cost of Building Housing Series, reviews the costs of building housing, including the high costs of impact fees that impose a significant expense for developers.
Terner Center for Housing Innovation, Improving Impact Fees in California: Rethinking the Nexus Studies Requirement, reviews the nexus studies of eight jurisdictions and identifies areas of improvement.
City of Fremont. Fee Deferral Program Amendment – Affordable Housing Deferrals.
City of Folsom. Fee Deferral Ordinance.