Development fees dealt blow

A previous Supreme Court ruling decades earlier stated such fees must adhere to what is referred to as the rough proportionality standard, which requires a close connection between a housing project’s impacts and the fee imposed. But California’s Supreme Court deemed such a standard is not applicable to much of the state’s fees, provided they are enacted administratively and applied consistently across all new housing developments.

But the decision has been flipped once more, with SCOTUS agreeing individuals could indeed challenge a city’s impact fees and that even uniformly set administrative fees must be reconsidered, said Matt Regan, senior vice president of policy at the Bay Area Council, a business advocacy group.

“We’re now in a situation where it’s a little unclear as to how the process is going to work moving forward. The court made a values decision but really didn’t give any direction or clarity to local jurisdictions on how to fix the mess,” Regan said.

Calculating the right level of impact fees — which fund services ranging from parks to child care and transportation — is difficult. On the one hand, local governments need revenue, beyond property taxes capped at 1%, to fund key infrastructure and services.

But if the fees are too high, individuals and developers may be incentivized to build in a neighboring city with lower fees or forgo the project altogether. Impact fees can easily comprise at least 4% of the total cost of a multiunit development in the county, and in an economic climate with tough lending conditions, the added financial burden could make or break whether additional housing is built. And nexus studies, which cities use to determine the fee schedule, have also come under scrutiny for what some experts say uses often a black box formula.

“In my opinion, there has never been a commissioned nexus study that didn’t find the nexus the city wanted to find. It’s an industry I’m not particularly trustful of,” Regan said.

Housing leaders and organizations such as YIMBY Law filed amicus briefs in the case, stating “impact fees exacerbate the housing shortage by making it more difficult and expensive to build.”

The alternative, however, an individual assessment for every prospective development, also raises challenges. Regan added, hypothetically, cities could start asking a single-family home applicant about how many children they have and if they go to public school to determine a school impact fee, for example.

“You can cook up some crazy scenarios in your head as to how this process would actually work,” he said. “How many questions do they get to ask of the project sponsor, particularly if they’re trying to build a single-family home?”

The total development impact fees in Millbrae are about $77,000 for a single-family home, and Redwood City’s impact fee just for the city’s park system is $47,000 for a single-family dwelling, although they’ve recently decided to make some exemptions, including for certain accessory dwelling units and one-bedroom additions. For commercial sites, the fees are typically higher. The developer of an in-progress commercial life science building near South City’s Caltrain station, for instance, agreed to pay more than $16 million in impact fees alone.

Exorbitant fees certainly impede housing progress, but Regan said the ruling creates other concerns to address.

“When you send a message to cities that use unfair fee schedules to block housing development, then that’s no longer a tool that is available to them,” he said. “But if we don’t sort out the back-end process in how that equitable fee is calculated, and if it makes it more onerous and more expensive than the fee itself, then we may have solved one problem and created another for ourselves.”