The Mitigation Fee Act, among other things, imposes various requirements with respect to the establishment, increase, or imposition of a fee by a local agency as a condition of approval of a development project, including requiring the local agency to identify the use to which the fee is to be put, as specified. The act requires a local agency, upon receipt of a fee subject to these provisions, to deposit, invest, account for, and expend the fees as specified. For the 5th fiscal year following the first deposit into the account of fund, and every 5 years thereafter, the act requires the local agency to make prescribed findings with respect to that portion of the account or fund remaining unexpended, whether committed or uncommitted, including demonstrating a reasonable relationship between the fee and the purpose for which it is charged.

The Planning and Zoning Law, among other things, authorizes the legislative body of a county or city to adopt ordinances to require, as a condition of development of residential rental units, that the development include a certain percentage of residential rental units affordable to, and occupied by, moderate-income, lower income, very low income, or extremely low income households or by persons and families of low or moderate income, as specified. Existing law establishes a process for the Department of Housing and Community Development to review certain types of these ordinances, subject to specified standards and procedures.

This bill, commencing on January 1, 2026, would require a local agency that collects inclusionary housing in-lieu fees and has an internet website to annually post on its internet website the amount of those fees collected in the previous year and whether those fees are intended to be used for a project, if any. The bill would define inclusionary housing in-lieu fees to mean fees imposed as an alternative means of compliance with an inclusionary housing requirement. The bill, commencing on January 1, 2026, and every 5 years thereafter, would require a local agency that collects inclusionary housing in-lieu fees to post on its internet website the amount of those fees collected in the past 5 years and the project those fees were spent on.

The bill would include findings that changes proposed by this bill address a matter of statewide concern rather than a municipal affair and, therefore, apply to all cities, including charter cities.

The Mitigation Fee Act, among other things, imposes various requirements with respect to the establishment, increase, or imposition of a fee by a local agency as a condition of approval of a development project, including requiring the local agency to identify the use to which the fee is to be put, as specified. The act requires a local agency, upon receipt of a fee subject to these provisions, to deposit, invest, account for, and expend the fees as specified. For the 5th fiscal year following the first deposit into the account of fund, and every 5 years thereafter, the act requires the local agency to make prescribed findings with respect to that portion of the account or fund remaining unexpended, whether committed or uncommitted, including demonstrating a reasonable relationship between the fee and the purpose for which it is charged.

The Planning and Zoning Law, among other things, authorizes the legislative body of a county or city to adopt ordinances to require, as a condition of development of residential rental units, that the development include a certain percentage of residential rental units affordable to, and occupied by, moderate-income, lower income, very low income, or extremely low income households or by persons and families of low or moderate income, as specified. Existing law establishes a process for the Department of Housing and Community Development to review certain types of these ordinances, subject to specified standards and procedures.

This bill, commencing on January 1, 2026, would require a local agency that collects inclusionary housing in-lieu fees and has an internet website to annually post on its internet website the amount of those fees collected in the previous year and whether those fees are intended to be used for a project, if any. The bill would define inclusionary housing in-lieu fees to mean fees imposed as an alternative means of compliance with an inclusionary housing requirement. The bill, commencing on January 1, 2026, and every 5 years thereafter, would require a local agency that collects inclusionary housing in-lieu fees to post on its internet website the amount of those fees collected in the past 5 years and the project those fees were spent on.

The bill would include findings that changes proposed by this bill address a matter of statewide concern rather than a municipal affair and, therefore, apply to all cities, including charter cities.

The Mitigation Fee Act, among other things, imposes various requirements with respect to the establishment, increase, or imposition of a fee by a local agency as a condition of approval of a development project, including requiring the local agency to identify the use to which the fee is to be put, as specified. The act requires a local agency, upon receipt of a fee subject to these provisions, to deposit, invest, account for, and expend the fees as specified. For the 5th fiscal year following the first deposit into the account of fund, and every 5 years thereafter, the act requires the local agency to make prescribed findings with respect to that portion of the account or fund remaining unexpended, whether committed or uncommitted, including demonstrating a reasonable relationship between the fee and the purpose for which it is charged.

The Planning and Zoning Law, among other things, authorizes the legislative body of a county or city to adopt ordinances to require, as a condition of development of residential rental units, that the development include a certain percentage of residential rental units affordable to, and occupied by, moderate-income, lower income, very low income, or extremely low income households or by persons and families of low or moderate income, as specified. Existing law establishes a process for the Department of Housing and Community Development to review certain types of these ordinances, subject to specified standards and procedures.

This bill, commencing on January 1, 2026, would require a local agency that collects inclusionary housing in-lieu fees and has an internet website to annually post on its internet website the amount of those fees collected in the previous year and whether those fees are intended to be used for a project, if any. The bill would define inclusionary housing in-lieu fees to mean fees imposed as an alternative means of compliance with an inclusionary housing requirement. The bill, commencing on January 1, 2026, and every 5 years thereafter, would require a local agency that collects inclusionary housing in-lieu fees to post on its internet website the amount of those fees collected in the past 5 years and the project those fees were spent on.

The bill would include findings that changes proposed by this bill address a matter of statewide concern rather than a municipal affair and, therefore, apply to all cities, including charter cities.

The Mitigation Fee Act, among other things, imposes various requirements with respect to the establishment, increase, or imposition of a fee by a local agency as a condition of approval of a development project, including requiring the local agency to identify the use to which the fee is to be put, as specified. The act requires a local agency, upon receipt of a fee subject to these provisions, to deposit, invest, account for, and expend the fees as specified. For the 5th fiscal year following the first deposit into the account of fund, and every 5 years thereafter, the act requires the local agency to make prescribed findings with respect to that portion of the account or fund remaining unexpended, whether committed or uncommitted, including demonstrating a reasonable relationship between the fee and the purpose for which it is charged.

This bill, commencing on January 1, 2026, would require a local agency that collects inclusionary housing zoning in-lieu fees to annually post on its internet website the amount of those fees collected in the previous year and whether those fees are intended to be used for a project, if any. The bill would define inclusionary housing in-lieu fees to mean fees imposed as an alternative means of compliance with an inclusionary housing requirement. The bill, commencing on January 1, 2026, and every 5 years thereafter, would require a local agency that collects inclusionary housing zoning in-lieu fees to post on its internet website the amount of those fees collected in the past 5 years and the project those fees were spent on.

The bill would include findings that changes proposed by this bill address a matter of statewide concern rather than a municipal affair and, therefore, apply to all cities, including charter cities.

The Mitigation Fee Act, among other things, prohibits a fee or exaction imposed as a condition of approval of a proposed development or development project from exceeding the estimated reasonable cost of providing the service or facility for which the fee or exaction is imposed. The act defines various terms for these purposes.

This bill would make nonsubstantive changes to the definitions under the act.

CONCURRENCE IN SENATE AMENDMENTS

CSA1 Bill Id:AB 2663

Author:(Grayson)

As Amended Ver:June 17, 2024

Majority vote

SUMMARY

Requires local agencies that collect inclusionary housing in-lieu fees and have a website to post on their website specified information about the amount of fees collected and how they were spent, starting January 1, 2026.

Senate Amendments

1. Clarifies that only local agencies with an internet website are subject to the requirements of this bill; and
2. Finds and declares that ensuring transparency of inclusionary housing in-lieu fees throughout the state is a matter of statewide concern and is not a municipal affair, therefore the provisions of this bill would apply to all cities, including charter cities.

COMMENTS

Inclusionary Housing: Inclusionary housing is a policy tool that encompasses both inclusionary zoning and the payment of inclusionary housing in-lieu fees, aimed at increasing the supply of deed-restricted affordable homes in new residential developments. Inclusionary zoning requires developers to allocate a certain percentage of units in new housing development as affordable to low- and moderate-income households. Inclusionary in-lieu fees offer developers the flexibility to contribute financially to local affordable housing funds instead of integrating affordable units directly into their developments. These fees are then used by local jurisdictions to finance the development of deed-restricted affordable housing elsewhere in the community. While inclusionary housing policies are one tool through which local governments can increase the supply of deed-restricted affordable housing, it is critical for jurisdictions using this tool to set the inclusionary rate so that it does not diminish financial feasibility for housing developments.

The legal framework for inclusionary housing in California has evolved over the years, marked by significant legislative and judicial developments. One pivotal court case was Palmer/Sixth Street Properties, L.P. v. City of Los Angeles (2009) 175 Cal.App.4^th 1396, which challenged the ability of local governments to enforce inclusionary zoning requirements on rental housing developments. The court's decision in this case limited the application of inclusionary zoning policies, leading to a push for legislative action to restore local authority.

In response, AB 1505 (Bloom), Chapter 376 was enacted in 2017. This legislation reaffirmed the power of local governments to mandate the inclusion of affordable housing units in new rental projects, subject to certain conditions. AB 1505 authorized local governments to impose inclusionary housing requirements on residential developments in the form of on-site inclusionary housing requirements, through the payment of inclusionary housing in-lieu fees, and/or through off-site construction of affordable units, with some parameters. AB 1505 effectively overturned the limitations imposed by the Palmer decision and provided a clearer legal basis for inclusionary housing policies in California.

Furthermore, the California Supreme Court's ruling in California Building Association v. City of San Jose (2015) 61 Cal.4^th 435, upheld the validity of inclusionary housing ordinances, reinforcing the principle that such requirements are within the purview of local governments' land use regulatory authority to promote public welfare.

The need for transparency in the allocation and expenditure of inclusionary housing in-lieu fees collected by local governments is underscored by recent activities of local governments. In Cupertino, a third-party investigation discovered that an "accounting error" led to the misuse of over $100,000 from the City's $5.2 million below-market-rate housing fund to pay legal fees related to a recent housing lawsuit. Increased transparency and clarity at the local level surrounding the use of inclusionary housing in-lieu fees may be necessary to ensure that funds collected are used promptly, effectively, and appropriately.

State and local governments currently face difficult budgetary environments and a slowdown in local housing permitting and construction,^[1] at a time when the state has a deficit of over one million affordable homes.^[2] Ensuring the appropriate usage of existing affordable housing funds, and increasing transparency into the use of these funds, would allow for increased advocacy at the local level should an adequate pipeline for these funds not be developed.

The Mitigation Fee Act: Impact fees refer generally to fees that offset the public costs of new infrastructure incurred by the larger community. The Mitigation Fee Act governs the imposition, collection, and use of impact fees collected by local governments when reviewing and approving development proposals.

Key aspects of the Mitigation Fee Act include:

1. Nexus Requirement: The Act requires a clear "nexus" or connection between the fee charged and the impact created by the development. This means that the fees collected must be used to address the specific impacts that the new development is expected to have on public facilities and services.
2. Proportionality: The fees must be proportional to the impact of the development.
3. Accountability: Local governments are required to establish separate accounts for the fees collected and to use the funds solely for the intended purposes. They must also provide annual reports on the status of the fees, including the balance and how the funds have been used.
4. Timing of Fee Payment: The Act specifies when fees can be collected, generally at the time of final inspection or when certificate of occupancy is issued, with some exceptions.
5. Refunds: If the fees collected are not used within five years, and specific findings are not made, the Act provides for the refund of the fees.

Courts have maintained that local inclusionary housing in-lieu fees are not considered fee "exactions" under the Mitigation Fee Act, and as such, the provisions of the Mitigation Fee Act generally do not apply to local inclusionary housing in-lieu fees. As such, transparency around the collection and expenditure of those fees varies from jurisdiction to jurisdiction.

Fee Transparency. In response to a 2019 Terner Center for Housing Innovation report on fee transparency, among other issues, AB 1483 (Grayson), Chapter 662, Statutes of 2019, required local governments to post specified housing-related information on their websites, including:

1. A current schedule of fees, exactions, and affordability requirements imposed by the city, county, or special district, including any dependent special districts of the city or county, applicable to a proposed housing development project, which must be presented in a manner that clearly identifies the fees, exactions, and affordability requirements that apply to each parcel;
2. Specified annual fee reports or specified annual financial reports; and
3. An archive of impact fee nexus studies, cost of service studies, or equivalent, conducted by the city, county, or special district on or after January 1, 2018.

AB 1473 (Senate Committee on Governance and Finance), Chapter 371, Statutes of 2020, required local agencies to separately post their connection fees and capacity charges, without being tied to specific parcels, and made technical fixes to ensure that special districts were properly accounted for by AB 1483. Additionally, AB 602 (Grayson), Chapter 347, Statutes of 2021, required local agencies, among other things, to do the following:

1. Post a written fee schedule or a link directly to the written fee schedule on its internet website.
2. Request from a development proponent, upon issuance of a certificate of occupancy or the final inspection, whichever occurs last, the total amount of fees and exactions associated with the project for which the certificate was issued. The city or county must post this information on its website, and update it at least twice per year. A city or county is not responsible for the accuracy of the information received by the development proponent.

According to the Author

"California is in the middle of a housing affordability crisis, and the high cost of development fees and local regulations has repeatedly been identified as one of the major drivers of the crisis. According to the Terner Center, development fees can amount to anywhere from 6% to 18% of the median home price, depending on location. While many development fees fall under the Mitigation Fee Act, certain fees in the development process are not governed by the Mitigation Fee Act, this includes in-lieu fees for affordable housing. AB 2663 would help enhance transparency and accountability on inclusionary housing in-lieu fees. The bill would require any local agency that collects inclusionary housing in-lieu fees to provide annual reports on how much was collected in fees and if the fees have been intended to be used for a project, if any. By making this information available and accessible, this bill will help to ensure that fees collected in the development process are well accounted for and implemented effectively during our housing affordability crisis."

Arguments in Support

According to the California Apartment Association, "multiple studies have shown that one of the major cost drivers to building new housing has been development fees, which can make up a significant portion of building costs. Many, but not all, of the fees that are involved in the development process fall under the Mitigation Fee Act. The Act clearly states that all fees collected pursuant to the Act must be used solely for the purpose for which the fee was collected. In-lieu fees do not fall under the Act, and, therefore, their amount and use are currently unreported. AB 2663 would help enhance transparency and accountability on inclusionary housing in-lieu fees by making this information available and accessible so that development fees can be accounted for."

Arguments in Opposition

None on file.

FISCAL COMMENTS

None.

VOTES:

ASM HOUSING AND COMMUNITY DEVELOPMENT: 9-0-0

YES: Ward, Joe Patterson, Grayson, Kalra, Lee, Quirk-Silva, Reyes, Sanchez, Wilson

ASM LOCAL GOVERNMENT: 9-0-0

YES: Juan Carrillo, Waldron, Essayli, Haney, Kalra, Pacheco, Ramos, Ward, Wilson

ASSEMBLY FLOOR: 65-0-15

YES: Addis, Aguiar-Curry, Alanis, Alvarez, Arambula, Bauer-Kahan, Bennett, Berman, Boerner, Bonta, Bryan, Calderon, Juan Carrillo, Wendy Carrillo, Chen, Connolly, Davies, Dixon, Essayli, Mike Fong, Vince Fong, Friedman, Gallagher, Garcia, Gipson, Hart, Holden, Hoover, Irwin, Jackson, Jones-Sawyer, Kalra, Lackey, Lee, Lowenthal, Maienschein, McCarty, McKinnor, Muratsuchi, Ortega, Pacheco, Papan, Jim Patterson, Joe Patterson, Pellerin, Quirk-Silva, Ramos, Rendon, Reyes, Rodriguez, Blanca Rubio, Sanchez, Santiago, Soria, Ta, Valencia, Villapudua, Waldron, Ward, Weber, Wicks, Wilson, Wood, Zbur, Robert Rivas

ABS, ABST OR NV: Bains, Cervantes, Megan Dahle, Flora, Gabriel, Grayson, Haney, Low, Mathis, Stephanie Nguyen, Petrie-Norris, Luz Rivas, Schiavo, Ting, Wallis

SENATE FLOOR: 39-0-1

YES: Allen, Alvarado-Gil, Archuleta, Ashby, Atkins, Becker, Blakespear, Bradford, Caballero, Cortese, Dahle, Dodd, Durazo, Eggman, Glazer, Gonzalez, Grove, Hurtado, Jones, Laird, Limón, McGuire, Menjivar, Min, Newman, Nguyen, Niello, Ochoa Bogh, Padilla, Portantino, Roth, Rubio, Seyarto, Skinner, Smallwood-Cuevas, Stern, Umberg, Wahab, Wiener

ABS, ABST OR NV: Wilk

UPDATED

VERSION: June 17, 2024

CONSULTANT: Dori Ganetsos / H. & C.D. / (916) 319-2085 FN: 0003727

1. HCD Annual Progress Report (APR) Data Dashboard: https://www.hcd.ca.gov/planning-and-community-development/housing-open-data-tools/housing-element-implementation-and-apr-dashboard ↑

2. HCD 2022 Statewide Housing Plan Update: https://statewide-housing-plan-cahcd.hub.arcgis.com/ ↑

 CONSENT  

Bill No: AB 2663

Author: Grayson (D)

Amended: 6/17/24 in Senate

Vote: 21

SENATE HOUSING COMMITTEE: 9-0, 6/4/24

AYES: Skinner, Ochoa Bogh, Blakespear, Caballero, Cortese, Menjivar, Seyarto, Umberg, Wahab

NO VOTE RECORDED: Padilla

SENATE LOCAL GOVERNMENT COMMITTEE: 7-0, 6/26/24

AYES: Durazo, Seyarto, Dahle, Glazer, Skinner, Wahab, Wiener

ASSEMBLY FLOOR: 65-0, 5/9/24 (Consent) - See last page for vote

SUBJECT: Inclusionary housing: fees: reports

SOURCE: Author

DIGEST:

This bill requires local agencies that collect inclusionary housing in-lieu fees and has a website to post on their website specified information about the amount of fees collected and how they were spent.

ANALYSIS:

Existing law:

1. Authorizes local governments to impose inclusionary housing requirements on residential developments in the form of on-site inclusionary housing requirements, through the payment of inclusionary housing in-lieu fees, or through off-site construction of affordable units, or both.
2. Establishes the Mitigation Fee Act, which requires a local agency to do all of the following:
   1. When establishing, increasing, or imposing a fee on a development project, the local agency must:
      1. Identify the purpose of the fee;
      2. Identify the use to which the fee is to be put;
      3. Determine how there is a nexus between the fee’s use and the type of development project on which the fee is imposed; and
      4. Determine how there is a nexus between the need for a public facility and the type of development project on which the fee is imposed.
   2. After a fee is collected, the local agency must:
      1. Deposit development project fees collected in a separate capital facilities account to avoid commingling with other funds, and use these fees, including any interest earned, solely for their intended purpose;
      2. Provide annual public reports detailing fee information, including balances, collections, expenditures, and specific improvements funded by the fees;
      3. Hold a public meeting to review the annual report, with notice provided to interested parties;
      4. Make specified findings with respect to any unexpended portions of accounts established under the Act every five years, whether the funds are committed or uncommitted; and,
      5. Complete the financing of public improvements once sufficient funds have been collected.
3. Requires a city, county, or special district that has an internet website to make information available on its internet website, including the current schedule of fees, exactions, and affordability requirements imposed by that city, county, or special district, applicable to a proposed housing development project.

This bill:

1. Defines “inclusionary housing in-lieu fee” as an alternative means of compliance with an inclusionary housing requirement.
2. Requires, beginning on January 1, 2026, a local agency that collects inclusionary housing in-lieu fees and has a web site to publish annually on its web site both of the following:
   1. The amount of inclusionary housing in-lieu fees collected in the previous year.
   2. Whether the fees are intended to be used for any project.
3. Requires, beginning on January 1, 2026, and every five years thereafter, a local agency that collects inclusionary housing in-lieu fees to post on its internet web site both of the following:
   1. The amount of inclusionary housing in-lieu fees collected in the past five years.
   2. The projects that the inclusionary housing in-lieu fees were spent on.

Background

Mitigation Fee Act. When approving development projects, counties and cities can require the developers to mitigate the project's effects by paying impact fees. Impact fees stem from a straightforward principle: new developments should pay for their impacts on the community and the burden they impose on public services.

When establishing, increasing, or imposing a fee as a condition of approving a development project, the Mitigation Fee Act requires local officials to:

1. Identify the fee's purpose;
2. Identify the fee's use, including the public facilities to be financed;
3. Determine a reasonable relationship between the fee's use and the development; and,
4. Determine a reasonable relationship between the public facility's need and the development.

Other requirements in the Mitigation Fee Act ensure that development fees are appropriately levied and spent, including that a local agency must:

1. Hold at least one open and public meeting prior to levying a new fee or increasing an existing one;
2. Deposit and spend the fees within five years of collecting them; and,
3. Refund fees or make specific findings on when and how the fees will be spent for construction, if the fees are not spent within five years of collection.

Comments

1. Author’s statement. According to the author, “California is in the middle of a housing affordability crisis, and the high cost of development fees and local regulations has repeatedly been identified as one of the major drivers of the crisis. According to the Terner Center, development fees can amount to anywhere from 6% to 18% of the median home price, depending on location. While many development fees fall under the Mitigation Fee Act, certain fees in the development process are not governed by the Mitigation Fee Act, this includes in-lieu fees for affordable housing. AB 2663 would help enhance transparency and accountability on inclusionary housing in-lieu fees. The bill would require any local agency that collects inclusionary housing in-lieu fees to provide annual reports on how much was collected in fees and if the fees have been intended to be used for a project, if any. By making this information available and accessible, this bill will help to ensure that fees collected in the development process are well accounted for and implemented effectively during our housing affordability crisis.”
2. Inclusionary housing policies. Using their police power, many cities and counties have adopted ordinances, commonly called "inclusionary zoning" or "inclusionary housing" ordinances, that require developers to ensure that a certain percentage of housing units in a new development be affordable to lower-income households. These ordinances vary widely in the percentage of affordable units required, the depth of affordability required, and the options through which a developer may choose to comply. Most, if not all, of such ordinances apply to both rental and ownership housing.

Additionally, state law, through the passage of AB 1505 (Bloom, Chapter 376, Statutes of 2017) reaffirmed the power of local governments to mandate the inclusion of affordable housing units in new rental projects, subject to certain conditions. AB 1505 authorized local governments to impose inclusionary housing requirements on residential developments in the form of on-site inclusionary housing requirements, through the payment of inclusionary housing in-lieu fees, or through off-site construction of affordable units, or a combination of these options.

1. Increasing transparency. According to a recent article in the San Jose Spotlight, the need for transparency in the allocation and expenditure of inclusionary housing in-lieu fees collected by local governments is underscored by a recent example in Cupertino. In that city, a third party investigation discovered that an “accounting error" led to the misuse of over $100,000 from the City's $5.2 million below-market-rate housing fund to pay legal fees related to a recent housing lawsuit.

This bill requires local governments that collect inclusionary housing in-lieu fees and post that information on their web site. Specifically, this bill requires annual reporting, beginning January 1, 2026 to identify how much in fees was collected the prior year and the intended use for those funds, as well as a report every five years documenting use of the funds over that time-period.

FISCAL EFFECT: Appropriation: No Fiscal Com.: No Local: No

SUPPORT: (Verified 6/27/24)

California Apartment Association

Habitat for Humanity California

OPPOSITION: (Verified 6/27/24)

None received

ASSEMBLY FLOOR: 65-0, 5/9/24

AYES: Addis, Aguiar-Curry, Alanis, Alvarez, Arambula, Bauer-Kahan, Bennett, Berman, Boerner, Bonta, Bryan, Calderon, Juan Carrillo, Wendy Carrillo, Chen, Connolly, Davies, Dixon, Essayli, Mike Fong, Vince Fong, Friedman, Gallagher, Garcia, Gipson, Hart, Holden, Hoover, Irwin, Jackson, Jones-Sawyer, Kalra, Lackey, Lee, Lowenthal, Maienschein, McCarty, McKinnor, Muratsuchi, Ortega, Pacheco, Papan, Jim Patterson, Joe Patterson, Pellerin, Quirk-Silva, Ramos, Rendon, Reyes, Rodriguez, Blanca Rubio, Sanchez, Santiago, Soria, Ta, Valencia, Villapudua, Waldron, Ward, Weber, Wicks, Wilson, Wood, Zbur, Robert Rivas

NO VOTE RECORDED: Bains, Cervantes, Megan Dahle, Flora, Gabriel, Grayson, Haney, Low, Mathis, Stephanie Nguyen, Petrie-Norris, Luz Rivas, Schiavo, Ting, Wallis

Prepared by: Alison Hughes / HOUSING / (916) 651-4124

6/28/24 13:06:21

**** END ****

SENATE COMMITTEE ON LOCAL GOVERNMENT

Senator María Elena Durazo, Chair

2023 - 2024 Regular

Inclusionary housing: fees: reports

Requires, starting on January 1, 2026, local agencies to annual post information on inclusionary housing in-lieu fees on its internet website.

Background

Local government finance after Proposition 13. A series of propositions have drastically cut into local revenue sources, requiring local governments to look elsewhere to fund services that the public demands. First, Proposition 13 (1978) capped property tax rates at 1 percent of assessed value (which only changes upon new construction or when ownership changes) and required 2/3 voter approval for special taxes; as a result local governments turned to general taxes to avoid the higher voter threshold. When Proposition 62 (1986) required majority voter approval of general taxes, local agencies imposed assessments that were more closely tied to the benefit that an individual property owner receives. Subsequently, Proposition 218 (1996) required voter approval of parcel taxes, assessments, and property-related fees.

In response to the reduction in property tax revenues from Proposition 13 and the difficulty of raising taxes, local agencies have turned to other sources of funds for general operations, including sales taxes and transient occupancy taxes, also known as hotel taxes. Commercial enterprises generate sales tax and hotel tax revenue, and simultaneously pay property taxes and demand relatively few services (such as public safety or parks). Residential developments, by contrast, do not directly generate sales or hotel tax revenue, and the new residents demand a wider variety of more intensive services. As a result, cities and counties face a disincentive to approve housing because of the higher net fiscal cost of residential development, particularly if they have the option to instead permit commercial development that may produce net fiscal benefits, also known as the fiscalization of land use.

Since they cannot impose broad-based taxes without great difficulty, cities and counties follow a simple principle: new developments should pay for the impacts they have on the community and the burden they impose on public services.

Mitigation Fee Act. When approving development projects, counties and cities can require the applicants to mitigate the project's effects by paying fees—known as mitigation fees, impact fees, or developer fees. The California courts have upheld impact fees for sidewalks, parks, school construction, and many other public purposes.

When establishing, increasing, or imposing a fee as a condition of approving a development project the Mitigation Fee Act requires local officials to:

• Identify the fee’s purpose;
• Identify the fee’s use, including the public facilities to be financed;
• Determine a reasonable relationship between the fee’s use and the development; and
• Determine a reasonable relationship between the public facility’s need and the development.

When imposing a fee as a condition of approving a development project, the Mitigation Fee Act also requires local officials to determine a reasonable relationship between the fee’s amount and the cost of the public facility. In its 1987 Nollan decision, the U.S. Supreme Court said there must be an “essential nexus” between a project's impacts and the conditions for approval. In the 1994 Dolan decision, the U.S. Supreme Court said that conditions on development must have a "rough proportionality" to a project's impacts.

In the 1996 Ehrlich decision, the California Supreme Court distinguished between “legislatively enacted” conditions that apply to all projects and “ad hoc” conditions imposed on a project-by- project basis. Ehrlich applied the “essential nexus” test from Nollan and the “rough proportionality” test from Dolan to “ad hoc’ conditions. The Court did not apply the Nollan and Dolan tests to the conditions that were “legislatively enacted.” In other words, local officials face greater scrutiny when they impose conditions on a project-by-project basis.

As a result of these decisions and the Mitigation Fee Act, local agencies must conduct a nexus study to ensure any proposed impact fees meet these legal tests for most impact fees. Other requirements in the Mitigation Fee Act ensure impact fees are appropriately levied and spent, including that a local agency must:

• Hold at least one open and public meeting prior to levying a new fee or increasing an existing one;
• If it decides to adopt capital improvement plans, indicate the approximate location, size, time of availability, and estimates of cost for all facilities or improvements to be financed with the fees;
• Deposit and spend the fees within five years of collecting them; and
• Refund fees or make specific findings on when and how the fees will be spent for construction, if the fees are not spent within five years of collection.

If a local agency levies an impact fee to fund a capital improvement associated with a development, it must deposit the fees with any other fees for that improvement in a separate account or fund.

Local officials must also produce an annual report within 180 days of the end of the fiscal year that includes information on the fee amounts, how they used the revenue, and any unspent funds, broken up by each separate fund. The local agency must review this information at the next regularly scheduled public meeting at least 15 days from when it makes the information available to public. It must also provide notice to the public at least 15 days prior to the meeting.

Impact fee transparency legislation. To increase transparency around impact fees, the Legislature enacted AB 1483 (Grayson, 2019). AB 1483 requires cities and counties to post specified housing-related information on their web sites and required HCD to establish a workgroup to develop a strategy for state housing data.

AB 1483 also requires a city, county, or special district that has an internet website to post on their websites the following information, as applicable:

• A current schedule of mitigation fees, exactions, and affordability requirements imposed by the city, county, or special district, including any dependent special districts of the city or county, applicable to a housing development project, in a manner that clearly identifies the fees that apply to each parcel;
• All zoning ordinances and development standards, including which standards apply to each parcel;
• A list that cities and counties must develop under existing law of projects located within military use airspace or low-level flight path;
• The current and five previous annual fee reports or the current and five previous annual financial reports that local agencies must compile under to existing law; and
• An archive of impact fee nexus studies, cost of service studies, or equivalent, conducted by the city, county, or special district on or after January 1, 2018.

A city, county, or special district must update this information on their website within 30 days of any change. The measure also required cities and counties to request the total amount of fees and exactions associated with the project from a developer after construction, but the developer does not have to respond. The city or county must post this information on its internet website, and update it at least twice per year.

Affordable housing fees. Some local governments impose fees to account for the increased need for affordable housing that can accompany new market rate development. Other jurisdictions impose requirements on new housing to include a certain percentage of units that are affordable to lower income families (known as an inclusionary housing requirement), and in some cases allow developers to pay fees instead of physically building the units (“inclusionary zoning fees” or “in-lieu fees”). Under current law, when approving development projects, counties and cities can require the applicants to mitigate the project's effects by paying fees. Some local governments impose fees to account for the increased need for affordable housing that can accompany new market rate development. Other jurisdictions impose requirements on new housing to include a certain percentage of units that are affordable to lower income families (known as an inclusionary housing requirement), and in some cases allow developers to pay fees instead of physically building the units (“inclusionary zoning fees” or “in-lieu fees”).

The author wants to ensure information on in-lieu fees is posted on local agencies’ websites.

Proposed Law

Assembly Bill 2663 requires, starting on January 1, 2026, local agencies with websites that collect inclusionary in-lieu fees to annually post both the following on their website:

• The amount of inclusionary housing in-lieu fees collected in the previous year; and
• Whether the local agency intends to use the inclusionary housing in-lieu fees for a project.

Starting on January 1, 2026, and every five years thereafter, a local agency that collects inclusionary housing in-lieu fees must post:

• The amount of inclusionary housing in-lieu fees collected in the past five years; and
• The projects funded by the inclusionary housing in-lieu fees.

Comments

1. Purpose of the bill. According to the author, “California is in the middle of a housing affordability crisis, and the high cost of development fees and local regulations has repeatedly been identified as one of the major drivers of the crisis. According to the Terner Center, development fees can amount to anywhere from 6% to 18% of the median home price, depending on location. While many development fees fall under the Mitigation Fee Act, certain fees in the development process are not governed by the Mitigation Fee Act, this includes in-lieu fees for affordable housing. AB 2663 would help enhance transparency and accountability on inclusionary housing in-lieu fees. The bill would require any local agency that collects inclusionary housing in-lieu fees to provide annual reports on how much was collected in fees and if the fees have been intended to be used for a project, if any. By making this information available and accessible, this bill will help to ensure that fees collected in the development process are well accounted for and implemented effectively during our housing affordability crisis.”

2. No free lunch. AB 2663 imposes new requirements on local agencies that impose in-lieu fees without any additional resources to help them comply with new requirements. Absent additional resources, local agencies may have to increase fees if they need additional resources to satisfy new requirements. So, while fees may be more transparent, they could end up higher than they were before. In the case of AB 2663, local agencies only have to post information online they already must make publicly available, which may not require significant additional resources. However, if a local agency must make more significant updates to its website to comply with these requirements, the agency would face more significant pressure to increase their fees.

3. Charter city. The California Constitution allows cities that adopt charters to control their own “municipal affairs.” In all other matters, charter cities must follow the general, statewide laws. Because the Constitution does not define “municipal affairs,” the courts determine whether a topic is a municipal affair or an issue of statewide concern. AB 2663 says its statutory provisions regarding development entitlements apply to charter cities. To support this assertion, the bill includes a legislative finding that ensuring transparency of inclusionary housing in-lieu fees is a matter of statewide concern.

4. The song that never ends. The Legislature is considering several other pieces of legislation concerning the Mitigation Fee Act:

• SB 937 (Wiener, 2024), which this Committee approved on a 6-0 vote at its April 3^rd hearing, makes various changes to the process for local agencies to collect development impact fees, and extends development entitlements. The measure is pending in the Assembly Local Government Committee.
• SB 1210 (Skinner, 2024), which this Committee approved on a 5-2 vote at its April 17^th hearing, requires electrical, gas, sewer, and water service utilities to post fee schedules and estimated timeframes for new service connections and capacity upgrades needed to connect new housing construction projects. The measure is awaiting referral in the Assembly Utilities and Energy Committee.
• AB 1820 (Schiavo, 2024), which this Committee approved on a 7-0 vote at its June 11^th hearing, requires a city or county to provide an estimate of fees and exactions for the project within 30 days of receiving a preliminary application for a housing development project upon a request from the project applicant for an estimate. The measure is currently pending in the Senate Housing Committee.
• AB 2553 (Friedman, 2024), which this Committee approved on a 5-1 vote at its June 11^th hearing, redefines “major transit stop” for purposes of exempting housing developments within ½ mile of a major transit stop from specified impact fees. The measure is currently pending in the Senate Housing Committee.
• AB 2729 (Joe Patterson, 2024) removes the requirement on local agencies that fees must be paid prior to the date of final inspection or issuance of the certificate of occupancy, whichever occurs first. The measure is also scheduled for this Committee’s June 26^th hearing.
• AB 3012 (Grayson, 2024), which this Committee approved on a 7-0 vote at its June 11^th hearing, requires cities and counties to create a fee estimate tool the public can use to calculate an estimate of fees and exactions for a proposed housing development project and make the tool available on its internet website. The measure is currently pending in the Senate Housing Committee.
• AB 3276 (Ramos, 2024), which this Committee approved on a 7-0 vote at its June 11^th hearing, requires local agencies to post certain impact fee information on their websites by the end of the 2029-30 fiscal year for the previous five years, which it must do every five years thereafter. The measure is currently pending in the Senate Appropriations Committee.
• AB 3177 (W. Carrillo, 2024), which this Committee approved on a 5-2 vote at its June 11^th hearing, prohibits land dedications for the purpose of mitigating vehicular traffic on housing developments. The measure is currently pending in the Senate Housing Committee.

6. Incoming! The Senate Housing Committee approved AB 2663 at its June 4^th hearing on a vote of 9-0. The Senate Local Government Committee is hearing AB 2663 as the committee of second reference.

Assembly Actions

Assembly Housing and Community Development Committee: 9-0
Assembly Local Government Committee: 9-0
Assembly Floor: 65-0

Support and Opposition

(6/21/24)

Support: California Apartment Association
Habitat for Humanity California

Opposition: None submitted.

-- END --

SENATE COMMITTEE ON HOUSING

Senator Nancy Skinner, Chair

2023 - 2024 Regular

Bill No: AB 2663 Hearing Date: 6/4/2024

SUBJECT: Inclusionary housing: fees: reports

DIGEST: This bill requires local agencies that collect inclusionary housing in-lieu fees to post on their website specified information about the amount of fees collected and how they were spent.

ANALYSIS:

Existing law:

1. Authorizes local governments to impose inclusionary housing requirements on residential developments in the form of on-site inclusionary housing requirements, through the payment of inclusionary housing in-lieu fees, or through off-site construction of affordable units, or both.
2. Establishes the Mitigation Fee Act, which requires a local agency to do all of the following:
   1. When establishing, increasing, or imposing a fee on a development project, the local agency must:
      1. Identify the purpose of the fee;
      2. Identify the use to which the fee is to be put;
      3. Determine how there is a nexus between the fee’s use and the type of development project on which the fee is imposed; and
      4. Determine how there is a nexus between the need for a public facility and the type of development project on which the fee is imposed.
   2. After a fee is collected, the local agency must:
      1. Deposit development project fees collected in a separate capital facilities account to avoid commingling with other funds, and use these fees, including any interest earned, solely for their intended purpose;
      2. Provide annual public reports detailing fee information, including balances, collections, expenditures, and specific improvements funded by the fees;
      3. Hold a public meeting to review the annual report, with notice provided to interested parties;
      4. Make specified findings with respect to any unexpended portions of accounts established under the Act every five years, whether the funds are committed or uncommitted; and,
      5. Complete the financing of public improvements once sufficient funds have been collected.
3. Requires a city, county, or special district that has an internet website to make information available on its internet website, including the current schedule of fees, exactions, and affordability requirements imposed by that city, county, or special district, applicable to a proposed housing development project.

This bill:

1. Defines “inclusionary housing in-lieu fee” as an alternative means of compliance with an inclusionary housing requirement.
2. Requires, beginning on January 1, 2026, a local agency that collects inclusionary housing in-lieu fees to publish annually on its web site both of the following:
   1. The amount of inclusionary housing in-lieu fees collected in the previous year.
   2. Whether the fees are intended to be used for any project.
3. Requires, beginning on January 1, 2026, and every five years thereafter, a local agency that collects inclusionary housing in-lieu fees to post on its internet web site both of the following:
   1. The amount of inclusionary housing in-lieu fees collected in the past five years.
   2. The projects that the inclusionary housing in-lieu fees were spent on.

COMMENTS:

1. Author’s statement. “California is in the middle of a housing affordability crisis, and the high cost of development fees and local regulations has repeatedly been identified as one of the major drivers of the crisis. According to the Terner Center, development fees can amount to anywhere from 6% to 18% of the median home price, depending on location. While many development fees fall under the Mitigation Fee Act, certain fees in the development process are not governed by the Mitigation Fee Act, this includes in-lieu fees for affordable housing. AB 2663 would help enhance transparency and accountability on inclusionary housing in-lieu fees. The bill would require any local agency that collects inclusionary housing in-lieu fees to provide annual reports on how much was collected in fees and if the fees have been intended to be used for a project, if any. By making this information available and accessible, this bill will help to ensure that fees collected in the development process are well accounted for and implemented effectively during our housing affordability crisis.”
2. Mitigation Fee Act. When approving development projects, counties and cities can require the developers to mitigate the project's effects by paying impact fees. Impact fees stem from a straightforward principle: new developments should pay for their impacts on the community and the burden they impose on public services.

When establishing, increasing, or imposing a fee as a condition of approving a development project, the Mitigation Fee Act requires local officials to:

1. Identify the fee's purpose;
2. Identify the fee's use, including the public facilities to be financed;
3. Determine a reasonable relationship between the fee's use and the development; and,
4. Determine a reasonable relationship between the public facility's need and the development.

Other requirements in the Mitigation Fee Act ensure that development fees are appropriately levied and spent, including that a local agency must:

1. Hold at least one open and public meeting prior to levying a new fee or increasing an existing one;
2. Deposit and spend the fees within five years of collecting them; and,
3. Refund fees or make specific findings on when and how the fees will be spent for construction, if the fees are not spent within five years of collection.
4. Inclusionary housing policies. Article XI, Section 7 of the California Constitution grants each city and county the power “to make and enforce within its limits all local, police, sanitary and other ordinances and regulations not in conflict with general laws.” This is generally referred to as the police power of local governments. The Planning and Zoning Law is a general law that sets forth minimum standards for cities and counties to follow in land use regulation, but the law also establishes the Legislature’s intent to “provide only a minimum of limitation in order that counties and cities may exercise the maximum degree of control over local zoning matters.”

Using this police power, many cities and counties have adopted ordinances, commonly called "inclusionary zoning" or "inclusionary housing" ordinances, that require developers to ensure that a certain percentage of housing units in a new development be affordable to lower-income households. These ordinances vary widely in the percentage of affordable units required, the depth of affordability required, and the options through which a developer may choose to comply. Most, if not all, of such ordinances apply to both rental and ownership housing.

Additionally, state law, through the passage of AB 1505 (Bloom, Chapter 376, Statutes of 2017) reaffirmed the power of local governments to mandate the inclusion of affordable housing units in new rental projects, subject to certain conditions. AB 1505 authorized local governments to impose inclusionary housing requirements on residential developments in the form of on-site inclusionary housing requirements, through the payment of inclusionary housing in-lieu fees, or through off-site construction of affordable units, or a combination of these options.

1. Increasing transparency. According to a recent article in the San Jose Spotlight, the need for transparency in the allocation and expenditure of inclusionary housing in-lieu fees collected by local governments is underscored by a recent example of in Cupertino^[1]. In that city, a third party investigation discovered that an “accounting error" led to the misuse of over $100,000 from the City's $5.2 million below-market-rate housing fund to pay legal fees related to a recent housing lawsuit.

This bill would require local governments that collect inclusionary housing in-lieu fees and post that information on their web site. Specifically, this bill would require annual reporting, beginning January 1, 2026 to identify how much in fees was collected the prior year and the intended use for those funds, as well as a report every five years documenting use of the funds over that time-period.

1. Double referral. This bill was also referred to the Local Government Committee.

Related Legislation:

AB 602 (Grayson, Chapter 347, Statutes of 2021) — established several new requirements for local governments in connection with adopting and imposing fees and exactions, as specified.

AB 1483 (Grayson, Chapter 662, Statutes of 2019) — required a city, county, or special district to maintain on its internet website, as applicable, a current schedule of fees, exactions, and affordability requirements imposed by the city, county, or special district, including any dependent special district and annual fee reports or annual financial reports, as specified. Required a city, county, or special district to provide on its internet website an archive of impact fee nexus studies, cost of service studies, or equivalent, as specified. 

AB 1505 (Bloom, Chapter 376, Statutes of 2017 — authorized the legislative body of any city or county to adopt an inclusionary housing ordinance that includes residential rental units affordable to lower- and moderate-income households.

FISCAL EFFECT: Appropriation: No Fiscal Com.: No Local: No

POSITIONS: (Communicated to the committee before noon on Wednesday,

May 29, 2024.)

SUPPORT:

California Apartment Association

Habitat for Humanity California

OPPOSITION:

None received.

-- END --

1. Annalise Freimarck. Cupertino spent affordable housing funds on lawsuit. San Jose Spotlight. March 26, 2024. Accessible here: https://sanjosespotlight.com/cupertino-spent-affordable-housing-funds-on-lawsuit/ ↑

Date of Hearing: May 1, 2024

ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT

Juan Carrillo, Chair

ABPCA Bill Id:AB 2663 (

Author:Grayson) – As Amended Ver:March 19, 2024

SUBJECT: Affordable housing fees: reports.

SUMMARY: Requires local agencies that collect inclusionary housing in-lieu fees to post information about the fees collected and spent on their internet website. Specifically, this bill:

1. Defines “affordable housing fees” as inclusionary housing zoning in-lieu fees.
2. Defines “local agency” as a county, city, whether general law or chartered, city and county, school district, special district, authority, agency, any other municipal public corporation or district, or other political subdivision of the state.
3. Requires, commencing on January 1, 2026, a local agency that collects affordable housing fees to annually post on its internet website both of the following:
   1. The amount of affordable housing fees collected in the previous year.
   2. Whether the affordable housing fees are intended to be used for a project, if any.
4. Specifies that, commencing on January 1, 2026, and every five years thereafter, a local agency that collects affordable housing fees shall post on its internet website both of the following:
   1. The amount of affordable housing fees collected in the past five years.
   2. The projects that the affordable housing fees were spent on.
5. Finds and declares that this bill addresses a matter of statewide concern rather than a municipal affair. Therefore, this bill applies to all cities, including charter cities.
   

FISCAL EFFECT: None.

COMMENTS:

1. Bill Summary. This bill requires a local agency that collects specified affordable housing fees to annually post on its website, beginning January 1, 2026, information related to the amount of fees collected in the previous year and whether the affordable housing fees are intended to be used for a project, if any. Beginning on January 1, 2026, this bill also requires a local agency that collects affordable housing fees to post on its website, every five years, information regarding the amount of fees collected in the past five years and the projects the fees were spent on. This bill is sponsored by the author.
   
2. Author’s Statement. According to the author, “California is in the middle of a housing affordability crisis, and the high cost of development fees and local regulations has repeatedly been identified as one of the major drivers of the crisis. According to the Terner Center, development fees can amount to anywhere from 6% to 18% of the median home price, depending on location. While many development fees fall under the Mitigation Fee Act, certain fees in the development process are not governed by the Mitigation Fee Act, this includes in-lieu fees for affordable housing.
   
   “AB 2663 would help enhance transparency and accountability on inclusionary housing in-lieu fees. The bill would require any local agency that collects inclusionary housing in-lieu fees to provide annual reports on how much was collected in fees and if the fees have been intended to be used for a project, if any. By making this information available and accessible, this bill will help to ensure that fees collected in the development process are well accounted for and implemented effectively during our housing affordability crisis.”
   
3. Inclusionary Housing. Inclusionary housing is a policy tool that encompasses both inclusionary zoning and the payment of inclusionary housing in-lieu fees, aimed at increasing the supply of deed-restricted affordable homes in new residential developments. Inclusionary zoning requires developers to allocate a certain percentage of units in new housing development as affordable to low- and moderate-income households, promoting socioeconomic diversity and equitable access to housing. In-lieu fees offer developers the flexibility to contribute financially to local affordable housing funds instead of integrating affordable units directly into their developments. These fees are then used by local jurisdictions to finance the development of affordable housing elsewhere in the community.
4. Mitigation Fee Act. When approving development projects, counties and cities can require the applicants to mitigate the project's effects by paying fees—known as mitigation fees, impact fees, or developer fees. The California courts have upheld impact fees for sidewalks, parks, school construction, and many other public purposes. When establishing, increasing, or imposing a fee as a condition of approving a development project, the Mitigation Fee Act requires local officials to:
   1. Identify the fee’s purpose.
      
   2. Identify the fee’s use, including the public facilities to be financed.
      
   3. Determine a reasonable relationship between the fee’s use and the development.
      
   4. Determine a reasonable relationship between the public facility’s need and the development.
5. AB 1483 of 2019. In response to a 2019 Terner Center for Housing Innovation report that studied fee transparency, among other issues, AB 1483 (Grayson), Chapter 662, Statutes of 2019, required cities, counties, and special districts to post specified housing related information on their websites. This information included the following:
   1. A current schedule of fees, exactions, and affordability requirements imposed by the city, county, or special district, including any dependent special districts of the city or county, applicable to a proposed housing development project, which must be presented in a manner that clearly identifies the fees, exactions, and affordability requirements that apply to each parcel.
      
   2. All zoning ordinances and development standards, which must specify the zoning, design, and development standards that apply to each parcel.
      
   3. A list that cities and counties must develop under existing law of projects located within military use airspace or a low-level flight path.
      
   4. Specified annual fee reports or specified annual financial reports.
      
   5. An archive of impact fee nexus studies, cost of service studies, or equivalent, conducted by the city, county, or special district on or after January 1, 2018.

Since the passage of AB 1483, the information required to be posted on a local agency’s website has changed. AB 1473 (Senate Committee on Governance and Finance), Chapter 371, Statutes of 2020, required local agencies to separately post their connection fees and capacity charges, without being tied to specific parcels, and made technical fixes to ensure that special districts were properly accounted for by AB 1483. Additionally, AB 602 (Grayson), Chapter 347, Statutes of 2021, required local agencies, among other things, to do the following:

• 1. Post a written fee schedule or a link directly to the written fee schedule on its internet website.
     
  2. Request from a development proponent, upon issuance of a certificate of occupancy or the final inspection, whichever occurs last, the total amount of fees and exactions associated with the project for which the certificate was issued. The city or county must post this information on its website, and update it at least twice per year. A city or county is not responsible for the accuracy of the information received by the development proponent.

1. Committee Amendments. The author has agreed to the following clarifying amendments:

65906.6. (a) For the purpose of this section, the following definitions apply

(1) “Affordable housing fees” means inclusionary housing zoning in-lieu fees. “Inclusionary housing in-lieu fees” means fees imposed as an alternative means of compliance with an inclusionary housing requirement.

(2) “Local agency” means a county, city, whether general law or chartered, city and county, school district, special district, authority, agency, any other municipal public corporation or district, or other political subdivision of the state.

(b) Commencing on January 1, 2026, a local agency that collects inclusionary housing in-lieu fees affordable housing fees shall annually post on its internet website both of the following:

(1) The amount of affordable housing fees inclusionary housing in-lieu fees collected in the previous year.

(2) Whether the inclusionary housing in-lieu fees affordable housing fees are intended to be used for a project, if any.

(c) Commencing on January 1, 2026, and every five years thereafter, a local agency that collects Inclusionary housing in-lieu fees affordable housing fees shall post on its internet website both of the following:

(1) The amount of inclusionary housing in-lieu fees affordable housing fees collected in the past five years.

(2) The projects that the inclusionary housing in-lieu fees affordable housing fees were spent on.

1. Previous Legislation. AB 602 (Grayson), Chapters 347, Statutes of 2021, added new requirements to impact fee nexus studies. Requires cities and counties to request certain information from development proponents and requires the Department of Housing and Community Development to develop a nexus study template.

AB 1483 (Grayson), Chapter 662, Statutes of 2019, required a city, county, or special district to maintain on its internet website, as applicable, a current schedule of fees, exactions, and affordability requirements imposed by the city, county, or special district, including any dependent special district and annual fee reports or annual financial reports, as specified. The bill required a city, county, or special district to provide on its internet website an archive of impact fee nexus studies, cost of service studies, or equivalent, as specified. 

AB 1505 (Bloom), Chapter 376, Statutes of 2017, authorized the legislative body of any city or county to adopt an inclusionary housing ordinance that requires the inclusion of residential rental units affordable to lower- and moderate-income households when housing developments are built.

1. Related Legislation. AB 3012 (Grayson) requires cities and counties to make available on their internet websites a fee estimate tool that the public can use to calculate an estimate of fees and exactions for a proposed housing development, and requires the Department of Housing and Community Development to create a fee schedule template and a list of best practices, as specified.
   
2. Arguments in Support. Habitat for Humanity California writes in support, “AB 1505 (Bloom, 2017) restored the ability for local jurisdictions to adopt inclusionary housing requirements. The bill allowed jurisdictions to adopt policies that required that a certain number of units be included in a development specifically for lower- income individuals. AB 1505 also specified that jurisdictions that adopt these policies must also provide an alternative means of compliance, which can include land dedication, off-site construction, and the payment of in-lieu fees.
   
   “While many fees that are collected throughout the development process are governed by the Mitigation Fee Act, not all fees fall under the Act’s jurisdiction. This includes in-lieu fees that are charged under local inclusionary housing ordinances. While many inclusionary housing ordinances include alternative means of compliance, including the payment of in-lieu fees to build affordable, there is no mechanism that helps ensure that these fees are being used for its stated purpose.

“AB 2663 would help enhance transparency and accountability on inclusionary housing in-lieu fees. The bill would require any local agency that collects inclusionary housing in-lieu fees to provide annual reports on how much was collected in fees and if the fees have been intended to be used for a project, if any. Additionally, the bill would require a local agency to provide a five-year report on the amount of inclusionary housing fees that have been collected over and what projects the funds have been spent on. By making this information available and accessible, this bill will help to ensure that fees collected in the development process are well accounted for and implemented effectively during our housing affordability crisis.”

1. Arguments in Opposition. None on file.
   
2. Double-Referral. This bill was double-referred to the Assembly Housing and Community Development Committee, where it passed on 9-0 vote on April 17, 2024.

REGISTERED SUPPORT / OPPOSITION:

Support

Habitat for Humanity

Opposition

None on file

Analysis Prepared by: Jimmy MacDonald / L. GOV. / (916) 319-3958

Date of Hearing: April 17, 2024

ASSEMBLY COMMITTEE ON HOUSING AND COMMUNITY DEVELOPMENT

Christopher M. Ward, Chair

ABPCA Bill Id:AB 2663 (

Author:Grayson) – As Amended Ver:March 19, 2024

SUBJECT: Affordable housing fees: reports

SUMMARY: Requires local agencies that collect inclusionary housing in-lieu fees to post information about the fees collected and spent on their internet website. Specifically, this bill:

1. Defines “affordable housing fees” as inclusionary housing zoning in-lieu fees.
2. Defines “local agency” as a county, city, whether general law or chartered, city and county, school district, special district, authority, agency, any other municipal public corporation or district, or other political subdivision of the state.
3. Requires local agencies that collect affordable housing in-lieu fees to annually post the following information on their website, beginning January 1, 2026:
   1. The amount of affordable housing in-lieu fees collected in the previous year; and,
   2. The intended use for any affordable housing fees collected, if applicable.
4. Each local agency collecting affordable housing in-lieu fees must also post the following information every five years, beginning January 1, 2026:
   1. The amount of affordable housing in-lieu fees collected in the past five years; and,
   2. The projects the affordable housing fees supported.

EXISTING LAW:

1. Authorizes local governments to impose inclusionary housing requirements on residential developments in the form of on-site inclusionary housing requirements, through the payment of inclusionary housing in-lieu fees, and/or through off-site construction of affordable units. (Government Code (GOV) Section 65850).
2. Establishes the Mitigation Fee Act (GOV 66000-66025) that requires a local agency to do all of the following:
   1. When establishing, increasing, or imposing a fee on a development project, the local agency must:
      1. Identify the purpose of the fee;
      2. Identify the use to which the fee is to be put;
      3. Determine how there is a nexus between the fee’s use and the type of development project on which the fee is imposed; and
      4. Determine how there is a nexus between the need for a public facility and the type of development project on which the fee is imposed.
   2. After a fee is collected, the local agency must:
      1. Deposit development project fees collected in a separate capital facilities account to avoid commingling with other funds, and use these fees, including any interest earned, solely for their intended purpose;
      2. Provide annual public reports detailing fee information, including balances, collections, expenditures, and specific improvements funded by the fees;
      3. Hold a public meeting to review the annual report, with notice provided to interested parties;
      4. Make specified findings with respect to any unexpended portions of accounts established under the Act every five years, whether the funds are committed or uncommitted; and,
      5. Complete the financing of public improvements once sufficient funds have been collected. This includes identifying an approximate date when construction will be commenced, and refunding any unexpended fees if the necessary findings are not made.
3. Requires a city, county, or special district that has an internet website to make information available on its internet website, including the current schedule of fees, exactions, and affordability requirements imposed by that city, county, or special district, applicable to a proposed housing development project. (GOV 65940.1)

FISCAL EFFECT: None.

COMMENTS:

The Mitigation Fee Act: Development fees serve many purposes and can be broadly divided into two categories: service fees and impact fees. Service fees cover staff hours and overhead, and are used to fund the local agency’s role in the development process such as paying for plan reviews, permit approvals, inspections, and any other services related to a project moving through various local departments. Impact fees refer generally to fees that offset the public costs of new infrastructure incurred by the larger community. The Mitigation Fee Act governs the imposition, collection, and use of impact fees collected by local governments when reviewing and approving development proposals.

Key aspects of the Mitigation Fee Act include:

1. Nexus Requirement: The Act requires a clear "nexus" or connection between the fee charged and the impact created by the development. This means that the fees collected must be used to address the specific impacts that the new development is expected to have on public facilities and services.
2. Proportionality: The fees charged must be proportional to the impact of the development.
3. Accountability: Local governments are required to establish separate accounts for the fees collected and to use the funds solely for the intended purposes. They must also provide annual reports on the status of the fees, including the balance and how the funds have been used.
4. Timing of Fee Payment: The Act specifies when fees can be collected, generally at the time of final inspection or when certificate of occupancy is issued, with some exceptions.
5. Refunds: If the fees collected are not used within five years, and specific findings are not made, the Act provides for the refund of the fees.

The Mitigation Fee Act plays a crucial role in ensuring that new developments contribute to the cost of expanding and maintaining public infrastructure and services, while also providing a legal framework to ensure that fees are fair, transparent, and directly related to the impacts of the development.

Inclusionary Housing: Inclusionary housing is a policy tool that encompasses both inclusionary zoning and the payment inclusionary housing in-lieu fees, aimed at increasing the supply of deed-restricted affordable homes in new residential developments. Inclusionary zoning requires developers to allocate a certain percentage of units in new housing development as affordable to low- and moderate-income households, promoting socioeconomic diversity and equitable access to housing. In-lieu fees offer developers the flexibility to contribute financially to local affordable housing funds instead of integrating affordable units directly into their developments. These fees are then used by local jurisdictions to finance the development of affordable housing elsewhere in the community.

The legal framework for inclusionary housing in California has evolved over the years, marked by significant legislative and judicial developments. One pivotal court case was Palmer/Sixth Street Properties, L.P. v. City of Los Angeles (2009) 175 Cal.App.4^th 1396, which challenged the ability of local governments to enforce inclusionary zoning requirements on rental housing developments. The court's decision in this case limited the application of inclusionary zoning policies, leading to a push for legislative action to restore local authority.

In response, AB 1505 (Bloom) was enacted in 2017. This legislation reaffirmed the power of local governments to mandate the inclusion of affordable housing units in new rental projects, subject to certain conditions. AB 1505 authorized local governments to impose inclusionary housing requirements on residential developments in the form of on-site inclusionary housing requirements, through the payment of inclusionary housing in-lieu fees, and/or through off-site construction of affordable units, with some parameters. AB 1505 effectively overturned the limitations imposed by the Palmer decision and provided a clearer legal basis for inclusionary housing policies in California.

Furthermore, the California Supreme Court's ruling in California Building Association v. City of San Jose (2015) 61 Cal.4^th 435, upheld the validity of inclusionary housing ordinances, reinforcing the principle that such requirements are within the purview of local governments' land use regulatory authority to promote public welfare.

Inclusionary housing policies, including both inclusionary zoning and in-lieu fees, are one tool through which local governments can increase the supply of deed-restricted affordable housing, although it is critical for jurisdictions using this tool to set the inclusionary rate so that it does not diminish financial feasibility for housing developments.

The need for transparency in the allocation and expenditure of inclusionary housing in-lieu fees collected by local governments is underscored by recent activity local governments. In Cupertino, a third party investigation discovered that an “accounting error" led to the misuse of over $100,000 from the City's $5.2 million below-market-rate housing fund to pay legal fees related to a recent housing lawsuit.

There is clearly the need for increased transparency and clarity at the local level surrounding the use of inclusionary housing in-lieu fees to ensure that funds collected are used promptly, effectively, and appropriately. The state and local governments currently face difficult budgetary environments and a slowdown in local housing permitting and construction,^[1] at a time when the state has a deficit of over 1 million affordable homes.^[2] It is critical to ensure that existing affordable housing funds are being spent to increase our affordable housing supply, and to increase transparency into the use of these funds to allow for increased advocacy at the local level should an adequate pipeline for these funds not be developed.

Arguments in Support: According to Habitat for Humanity California, “AB 2663 would help enhance transparency and accountability on inclusionary housing in-lieu fees. The bill would require any local agency that collects inclusionary housing in-lieu fees to provide annual reports on how much was collected in fees and if the fees have been intended to be used for a project, if any. Additionally, the bill would require a local agency to provide a five-year report on the amount of inclusionary housing fees that have been collected over and what projects the funds have been spent on. By making this information available and accessible, this bill will help to ensure that fees collected in the development process are well accounted for and implemented effectively during our housing affordability crisis.”

Arguments in Opposition: None on file.

Related Legislation:

AB 602 (Grayson), Chapters 347, Statutes of 2021. This bill established several new requirements for local governments in connection with adopting and imposing fees and exactions, including new nexus study and capital facilities planning obligations. The bill also requires local governments to request fee and exaction information from developers and then post whatever information is voluntarily provided on the local agency's to increase transparency with respect to the overall level of fees and exactions imposed on new housing in the jurisdiction. 

AB 1483 (Grayson), Chapter 662, Statutes of 2019. This bill requires a city, county, or special district to maintain on its internet website, as applicable, a current schedule of fees, exactions, and affordability requirements imposed by the city, county, or special district, including any dependent special district and annual fee reports or annual financial reports, as specified. The bill requires a city, county, or special district to provide on its internet website an archive of impact fee nexus studies, cost of service studies, or equivalent, as specified. 

AB 1505 (Bloom), Chapter 376, Statutes of 2017. This bill authorized the legislative body of any city or county to adopt an inclusionary housing ordinance that includes residential rental units affordable to lower- and moderate-income households.

Double referred: This bill was also referred to the Assembly Committee on Local Government, where it will be heard should it pass out of this committee.

REGISTERED SUPPORT / OPPOSITION:

Support

Habitat for Humanity California

Opposition

None on file.

Analysis Prepared by: Dori Ganetsos / H. & C.D. / (916) 319-2085

1. HCD Annual Progress Report (APR) Data Dashboard: https://www.hcd.ca.gov/planning-and-community-development/housing-open-data-tools/housing-element-implementation-and-apr-dashboard ↑

2. HCD 2022 Statewide Housing Plan Update: https://statewide-housing-plan-cahcd.hub.arcgis.com/ ↑