Development Impact Fee Requirements Addressed In Newly Signed Housing Bills

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Assembly Bill 602 and Senate Bill 319

In September 2021, California Governor Gavin Newsom signed two bills — Assembly Bill (AB) 602 and Senate Bill (SB) 319 — that provide new statewide requirements for local jurisdictions seeking to impose development impact fees on development projects.

As background, local agencies are allowed to charge fees to development project applicants — known as mitigation fees, impact fees, or developer fees — for the purpose of defraying all or a portion of the cost of public facilities related to the development project. Impact fees support a wide range of community services and benefits such as public safety infrastructure, transportation infrastructure, affordable housing, environmental mitigation, libraries, parks, flood control, and other projects.

The Mitigation Fee Act establishes specific requirements local officials must follow in establishing, increasing, or imposing development fees. (Gov. Code, §66000 et seq.) Importantly, local officials must conduct a “nexus study” to demonstrate a “reasonable relationship” between the fees and public facilities funded by the fees, and the development project on which the fees are assessed. (Gov. Code. §66001.) Development impact fees must be reasonable.

However, local agencies’ nexus studies have been governed by “an opaque and informal patchwork of guidelines and common practices.” (See AB 602 Senate Floor Analysis, 8/31/21.) As a result, AB 602 and SB 319 provide additional guidance on how local agencies comply with their impact fee obligations. These laws attempt to balance the need for impact fee transparency with the potential effects on developers and local agencies. AB 602 also reforms impact fee collection for housing projects in an effort to encourage smaller, more affordable units.

AB 602 (Grayson)

The first new law, AB 602, imposes new requirements on local agencies preparing impact fee nexus studies. The law establishes basic transparency and accountability standards, including:

  • Local agencies must adopt an impact fee nexus study before a development fee is adopted.
  • The nexus study must include the “reasonable relationship” information that supports the agency’s actions (Gov. Code, §66001).
  • The nexus study must identify the existing and proposed new level of service for each public facility, and explain why any new level of service is appropriate.
  • If the nexus study supports increasing an existing fee, the local agency must review the assumptions of the nexus study supporting the original fee and evaluate the amount of fees collected under the original fee.
  • For housing development projects, nexus studies adopted after July 1, 2022 must calculate the amount of fees based on square footage of proposed units of the development, unless the local agency demonstrates that another metric is more appropriate. This is intended to support smaller and multi-family developments, and ensure such developments are not charged disproportionate fees (which would be the case if, for example, fees are charged on a per-unit basis).
  • Large jurisdictions (counties with populations of at least 250,000 or any city located therein, regardless of population) must adopt a capital improvement plan as part of their nexus study.
  • All nexus studies must be adopted at a public hearing with at least 30 days’ notice, including notice to any member of the public that requests notice.
  • Any member of the public may submit evidence that the local agency’s findings are insufficient, or that the agency failed to comply with the required procedures for adopting fees. The local agency must consider all such evidence.
  • Local agencies must update their nexus studies at least once every eight years.
  • Local agencies must request the total amount of fees from the development proponent upon issuance of a certificate of occupancy or the final inspection, whichever occurs last.
  • Local agencies must post fee information on their websites.

In addition, AB 602 requires the California Department of Housing and Community Development (HCD) to create a template for impact fee nexus studies. The template must be completed by 2024 and local jurisdictions will have the option — but will not be required — to use the HCD template.

Finally, as to AB 602’s scope, the new law does not extend its nexus study requirements to all housing development costs. Specifically, AB 602 does not apply to: (i) water and sewer connection and capacity charges; (ii) school fees; and (iii) Mello-Roos or other taxes. These other fees and charges are subject to their own statutory accountability measures.

SB 319 (Melendez)

In related legislation, SB 319 clarifies and expands the scope of the audits that local agencies must perform if they fail to comply with their reporting obligations under the Mitigation Fee Act.

Under pre-existing law, local agencies must produce an annual impact fee report each fiscal year, which discloses specified information accounting for the development fees and related public improvements. (Gov. Code, §66006.) In addition, developers — or anyone else — can request an audit of development fees to ensure that they are reasonable. (Gov. Code, §66023.) To the extent that the audit determines that the amount of any fee does not meet the statutory requirements, the local agency must adjust the fee accordingly. (Ibid.) Typically, the party that requests the audit must pay the local agency’s costs in performing the audit. But, if the agency failed — for three consecutive years — to produce its required annual impact fee report, then the agency must pay the cost of the audit. (Id., §66023(h).)

SB 319 closes a “loophole” in the scope of the audit that local agencies must pay for when they fail to complete their annual impact fee reporting obligations. It was unclear under pre-existing law how many years the audits were required to cover. SB 319 specifies that, when local agencies are required to pay for audits due to their failure to comply with their reporting obligations, the audits must cover each consecutive year that the local agency was out of compliance. Thus, SB 319 will help present a clearer picture of whether the local agency has adequately justified its impact fee levels and whether it should adjust its fees.

Conclusion and Takeaways

Studies have found that development impact fees can be a barrier to development and raise home prices. Development fees can amount to anywhere from 6 to 18 percent of the median price of a home depending on location, according to the AB 602 Senate Floor Analysis. At the same time, local governments face substantial fiscal constraints and thus have turned to fees as a source of revenue to fund public services.

As a result, AB 602 provides new statewide standards for impact fee nexus studies. Also, while AB 602 does not actually cap or reduce impact fees, it aims to help developers cut costs in terms of project time by making it easier to navigate local impact fee information. California Assemblymember Grayson (author of AB 602), citing support from housing proponents, tweeted his belief that AB 602 will “incentivize more naturally-affordable housing across the state by increasing transparency around impact fees and requiring them to be proportional to the size of a home.” But, critics have claimed that AB 602 “usurps” local control and dictates how local jurisdictions should address their local issues. And the legislative analysis notes that AB 602 imposes “unknown, significant” costs for local agencies to comply with the new requirements, which will most likely be passed on to development proponents in the form of higher fees. Indeed, AB 602 specifies that although it is a state-mandated program, these costs are not reimbursable by the state, because local agencies have general authority to charge and adjust planning and permitting fees to cover their administrative expenses.

Studies also have found that fee transparency could be substantially improved. SB 319 represents an effort to make progress on that front by clarifying that the scope of audits prepared by a local agency must cover each consecutive year that the agency failed to report. The closing of this “loophole” further incentivizes local agencies to comply with their annual reporting obligations. It also reduces the financial burden for those seeking to audit local agencies’ impact fees.

In short, AB 602 and SB 319 will help to better ensure that local agencies justify their development impact fees. These accountability and transparency measures will hopefully have the effect of minimizing fees and incentivizing housing. But, there is a potential that the new mandates will drive up local agencies’ costs — and, hence, development fees.

[This alert does not constitute legal advice and no attorney-client relationship is created by viewing or responding to this alert.  Legal counsel should be sought for answers to specific legal questions.]