Will impact fee reform come to the Peninsula?

The 10-year Peninsula resident planned to convert the single-family dwelling into a duplex to house his in-laws in one unit and rent out the other to help cover the building costs. He initially received a $17,000 bill for the park impact fee but, despite the sticker shock, decided to move forward and adjusted his total projected costs. By the time the city approved his plans, however, it had raised the park fee to about $27,000.

“I was familiar with the cost of the planning application and the building permit, but what was extra was the $27,000 and these other fees,” Marreiro said. “We’re just individuals. We’re not developers. This is not an insignificant amount of money for anyone.”

Such costs, often known as impact fees, are not unique to San Mateo and, in fact, they’re ubiquitous across the country, although cities in California — especially within the Bay Area — tend to rank as some of the highest in the country. Most jurisdictions impose such one-time charges, which are separate from planning and permit costs, to fund key services and infrastructure projects, particularly those that are underfunded or don’t have a dedicated revenue source. An evaluation, or nexus study, must be completed to determine a fee amount commensurate with the impact each type of development will have on a city.

San Mateo’s fees for residential developments go toward projects ranging from wastewater treatment to transportation improvements and park facilities. Additional fees are imposed on larger residential or commercial developments, which can fund public art and other under-resourced initiatives, such as child care and affordable housing.

The cost of fees

But fees have become so high in some areas that some have questioned whether it is backfiring on cities’ housing growth goals, which have become more highly monitored by the state. Redwood City’s park impact fee alone for a single-family dwelling is roughly $47,000 — not including additional impact fees, such as transportation and school costs — and a one bedroom addition has a $18,000 park fee. The total development impact fees in Millbrae are about $77,000 for a single-family home.

“In practice, there has been a lot of criticism of nexus studies, because they justify fees that a layman looks at and says, ‘This isn’t reasonable at all,’’ YIMBY Law Policy Director Rafa Sonnenfeld said. “Putting all of the burden on expanding the park system on the people who are newcomers to the city to basically subsidize the cost of the parks through rents on their new projects doesn’t seem equitable or reasonable.”

While they tend to have more financial resources at their disposal than individual property owners, large developers for both residential and commercial buildings have also felt the pinch, especially in an economic climate with tougher lending conditions, high interest rates and generally upward-trending labor costs.

“Impact fees often cost anywhere from 4[%] to 15% of total development. People may say 4% is not even very much, but when your margin of profit that you need is 8%, and you are at 10%, then adding the 4% cost is harder,” Jeremy Levine, policy manager at Housing Leadership Council of San Mateo County, said. “The developments in San Mateo County are operating on thin margins.”

Supreme Court case

The issue has even reached the U.S. Supreme Court, with El Dorado County resident George Sheetz claiming the area’s roughly $23,000 traffic impact fee is not proportional to the effect his 1,800-square-foot home has on local traffic patterns. A ruling in his favor would not strip cities’ ability to impose impact fees altogether but would likely make it easier for residents and developers to challenge cities when they feel a particular fee is unfair.

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 legislatively and applied uniformly across all new housing developments.

“That is what is now going to be decided — is that true what California has said, that individualized determination and rough proportionality don’t apply to legislatively imposed fees?” Paul Campos, senior vice president of governmental affairs at the Bay Area Building Industry Association, said. “What it means is if you do decide to challenge an impact fee in California, you will have at least a fighting chance. You’ll have the opportunity to show that your project shouldn’t be lumped in with this generally applicable nexus study that was done.”

Limiting local control

But South San Francisco Councilmember Flor Nicolas said opening the door to such case-by-case challenges is what could lead to building impediments more so than impact fees themselves.

“That will be more costly, delay development and also be subjective. If a person has more influence, maybe they’ll influence how their fee is computed,” Nicolas said. “But because it’s by legislative action, our fee study right now is objective and really masks the identity of that applicant, and regardless of who they are, this is the formula the city uses.”

She added South San Francisco undergoes rigorous analysis to determine the fee structure and, due to its status as a life science hub, many biotech companies often weigh the costs and ultimately choose to pay a premium for the benefit of being close to other industry firms. The developer of an in-progress commercial life science building near the city’s Caltrain station, for instance, agreed to pay more than $16 million in impact fees alone, which go toward South City’s public safety, child care, library and art funds.

Federal interference from the Supreme Court, coupled with more state scrutiny could further handcuff local governments, even though they are most knowledgeable about what needs the most investment and have limited revenue options to leverage, she added.

Tax revenue

The nearly 50-year-old Proposition 13, which caps property taxes to 1% of assessed value, is often cited as the culprit for the high cost of development, as it effectively forced cities to seek other sources of revenue beyond property taxes. But critics have said cities can run bond measures or introduce parcel taxes to fund particular projects and services.

And though property tax rates are fixed, Campos said the state and many municipalities, including several in the Bay Area, are not necessarily hurting for revenue, as California ranks in the top third of all states for per capita property tax collection and about third for overall tax collection per capita.

“There’s a lot of property tax revenue. We have just decided to spend it in a different way,” he said, citing measures such as Proposition 98, which establishes a state-level minimum funding requirement for schools. “People can say it’s proper or not, but I do think it’s very important to point out that it is a policy choice, as opposed to California not having property tax revenue because of Prop. 13.”

Unlikely allies

The issue has drawn unlikely allies from across the political spectrum. The conservative-leaning Pacific Legal Foundation has supported Sheetz, and some legal experts expect the conservative-majority court to rule in his favor. But traditionally left-leaning, pro-housing advocates, have also voiced concern with local jurisdictions over the high fees. The progressive state Sen. Scott Wiener, D-San Francisco, recently introduced Senate Bill 937, which calls on cities to delay the impact fee collection until a certificate of occupancy is issued. However, Nicolas, a self-described Democrat, is insistent on the need to maintain local control and avoid state and federal overreach.

That has also caught the attention of Levine, with the Housing Leadership Council.

“Housing is one of the few things that unites people across political parties. You’ll have Republicans and liberal Democrats fighting affordable housing in their neighborhoods, and you’ll have Republicans and progressive Democrats challenging the regulatory barriers,” Levine said.

Possibility of change?

A core contention on the part of those hoping for fee reform revolves around the formation of nexus studies. More skeptical critics liken it to a black box, where consultants find ways to come up with formulas ultimately affirming what a city wants to charge. Levine said there is moral justification for such fees, but that cities have used dubious methodologies to overestimate the trust costs. Sailesh Mehra, an entitlement and development consultant and former city planner in San Francisco and throughout the Peninsula, said it’s possible to have fair and transparent studies, but they will only be as good as the consulting firm and the city staff tasked with implementation.

“In Redwood City, when we were adopting fees, we sat down with developers, we sat down with architects, and we sat down with real estate professionals, and once they understood why, not all of them said, ‘Here, take my money,’ but a lot of them did say that makes sense,” Mehra said. “Make it reasonable, and if you don’t, the market or the activity will tell you that your fees are too high.”

He added some county jurisdictions have also been more amenable to exempting ADUs and other smaller properties from the high fees after seeing projects abandoned due to the higher-than-anticipated price tags.

For Marreiro, a software engineer, and his wife, a doctor, the extra fees did not keep them from building the extra unit, but it made them wonder how others in a different financial circumstance would fare.

“Ultimately, we were going to do this one way or another because this is for our in-laws, and the primary goal is just to create a family residence for them,” Marreiro said. “But the process I think could discourage people with different intentions. … It seems contrary to the stated goals of helping people, both developers but also individuals, add units to the city.”