Fees and exactions are really two facets of the same thing: direct charges or dedications collected on a one-time basis as a condition of an approval being granted by the local government. The purpose of the fee or exaction must directly relate to the need created by the development. In addition, its amount must be proportional to the cost of improvement.
Fees can be categorized in four major classes: (1) development impact fees (often called "developer fees") which are levied on new development to cover the cost of infrastructure or facilities necessitated by that development; (2) permit and application fees which cover the cost of processing permits and development plans; (3) regulatory fees; and (4) "property related fees and charges," as defined by Proposition 218. This chapter will focus primarily on developer fees and property related fees and charges.
Proposition 218 does not apply to "existing laws relating to the imposition of fees or charges as a condition of project development" (Section (b)(1), Article XIIID, California Constitution). Accordingly, development impact fees continue to be governed by the Mitigation Fee Act (Government Code section 66000, et seq.) and do not require voter approval. Similarly, Proposition 218 does not apply to permit and application fees. As will be discussed later, Proposition 218 requires property related fees and charges to be put to a vote of affected property owners, and classifies "standby fees" the future installation of utilities as assessments not fees, subject to its limitations and voting requirements.
Proposition 218 provides that any fee "imposed by an agency upon a parcel or a person as an incident of property ownership, including a user fee or charge for a property related service" requires prior approval of a simple majority of affected property owners or a two-thirds majority of the voters in the affected area. The initiative also lays out the specific method for establishing such fees. These requirements are detailed in the following section entitled "Property Related User Fees and Standby Charges."
Traffic mitigation fees, infrastructure improvement fees, and fees for improving sewer and water systems to accommodate new development are common examples of development impact fees. "Exaction" is a broader term for impact fees, dedications of land, and in-lieu fees that are imposed to fund public improvements necessitated by the proposed development. School facility fees, park land dedication requirements, and road dedication and improvement are all examples of exactions.
After the passage of Proposition 13, local government found itself with less money to pay for infrastructure improvements. In the past, cities and counties have, to a certain extent, subsidized new development by installing infrastructure or by charging impact fees that did not pay for the entire cost of the infrastructure necessitated by the project. Today, as new development occurs, cities and counties find themselves unable to afford the improvements that the development will need. They are turning to the developer to carry the burden of these costs. As a general rule, if the local government has the power to deny a project, then it also has the power to approve it subject to conditions that mitigate the reason for denial.
A development impact fee is an exaction that is imposed as a precondition for the privilege of developing land. Such fees are commonly imposed on developers by local governments in order to lessen the impacts of increased population or demand on services generated by that development. Local governments derive their authority to impose exactions from two sources: the "police power" granted to them by the State Constitution; and/or specific state enabling statutes such as the Subdivision Map Act.
Exactions and impact fees give new meaning to the old saying "you get what you pay for." Developers, and the new home buyers to whom the costs are passed, now find that they are paying more for what they get than ever before. A 1987 survey by the Bay Area Council found that the average impact fee for single family homes in the San Francisco Bay Area had increased by 644% in the previous ten years. At that time, the median fee for building a small detached residence was $9110. Fees have continued to rise in the 10 year since.
The increasing costs of impact fees is exacerbated by the cumulative effect of paying fees for more than one purpose and to more than one public entity. For example, the City of Roseville collects a parks fee, a sewer connection fee, a public facilities fee, and other fees. Its school district also imposes a fee.The total fees associated with new home construction in Roseville may exceed $13,000. Similar fee levels can be found in the cities of San Jose, San Ramon, and Anaheim.
As the dollar amount of impact fees has increased, so has the range of uses to which exactions are being put. The City of San Francisco collects impact fees from downtown commercial development for public transit improvements, low and moderate-income housing, and child care. The City of Irvine collects impact fees for traffic improvements. Concord funds child care through impact fees paid by non-residential development. Fresno uses impact fees to pay for fire stations, overpasses, railroad crossings, and traffic signals required by new growth. Orange County and its cities collect impact fees from new subdivisions to fund the construction of four major highway corridors.
Establishing reasonable and defensible impact fees is a special science.
Cities and counties must be careful to limit fees to reasonable levels,
to apply such fees equitably and proportionally, and to comply with the
Mitigation Fee Act. For an excellent general discussion of this topic, refer
to: The Calculation of Proportionate-Share Impact Fees, PAS Report
No. 408, by James Nicholas and available from the American Planning Association.
Although this book does not address California law's special requirements,
its detailed suggestions for relating fees to projected impacts are helpful
when drafting an impact fee ordinance. A more detailed reference is the
highly informative Public Needs and Private Dollars and its 1995 supplement
by William Abbott, Marian E. Moe, and Marilee Hansen (available from Solano
Press Books, Point Arena, CA). It discusses the legal basis for impact fees
and offers practical, California-specific advice about calculating and imposing
such fees.
Subdivision Exactions
The Subdivision Map Act (Government Code section 66410 et seq.) gives cities and counties statutory authority to impose fees or dedications of land for specific uses as conditions of subdivision map approval.
The Map Act provides that certain types of exactions may only be imposed if a local subdivision ordinance contains specific enabling language to do so. The following sections of the Map Act provide enabling authority for such local ordinances.
There are also exactions which may be imposed under the Subdivision Map Act without the adoption of a local enabling ordinance.
Fees vs. Taxes and Assessments
Fees which do not exceed the reasonable cost of providing the regulatory activity or service for which they are charged and which are not levied for general revenue purposes are not "special taxes" (Government Code section 50076). If a fee is subjected to legal challenge, the jurisdiction that is charging the fee carries the burden of proving that it is not a special tax (Government Code section 50076.5). Fees may be further distinguished from taxes because they are voluntary (in that development is a voluntary act) rather than compulsory and are imposed only upon those developing land rather than upon all landowners or taxpayers uniformly.
The relationship between users fees and special assessments is not as clear. In San Marcos Water District v. San Marcos Unified School District (1986) 42 Cal.3d 154, the California Supreme Court concluded that "a fee aimed at assisting a utility district to defray costs of capital improvements will be deemed a special assessment from which other public entities are exempt." Although the primary holding in this case (that one district need not pay another district's capital facilities fee) has been revised by the State Legislature as discussed later in this chapter, its view of the relationship between fees and special assessments remains. Any fee which qualifies as an "assessment" under Proposition 218 is subject to the approval requirements applicable to assessments.
Several court cases decided before and after the passage of Proposition 13 have upheld fees and exactions against challenges that they are taxes or special assessments. Here is a brief look at some of the more important decisions.
Associated Homebuilders of the East Bay v. City of Walnut Creek (1971) 4 Cal.3d 633 ratified the use of "Quimby Act"-type fees for exacting park and recreation land from new subdivision development. The court held that "a general public need for recreational facilities caused by present and future subdivisions" could justify the levying of exaction.
Mills v. Trinity County (1980) 108 Cal.App.3d 656 upheld the imposition of local fees for processing subdivisions, zoning, and other land use applications as long as they do not exceed the reasonable cost of providing services necessary to the activity for which the fee is charged.
Trent Meredith v. City of Oxnard (1981) 114 Cal.App.3d 317 upheld the validity of fees imposed under the School Facilities Act (authorizing exactions for interim school facilities) in the face of allegations that they constituted a special tax. The court pointed out that, unlike taxes, the fees were related to benefits received by or burdens created by the development.
Terminal Plaza Corporation v. City and County of San Francisco (1986) 177 Cal.App.3d 892 held that an ordinance requiring developers to provide replacement units whenever residential structures were demolished or converted to another use could be imposed under the city's police power. The exaction was held to be reasonably related to the cost of services necessitated by the project and was not levied for general revenue purposes.
Russ Building Partnership v. City and County of San Francisco (1987) 188 Cal.App.3d 977 upheld the city's exaction of a transit impact fee from new office development. The city had carefully established a factual basis for the fee before enacting it. The court concluded that the fee did not amount to double taxation because it was not imposed on the same property, at the same time, by the same authority, for the same purpose as any city tax. In fact, it was not a tax at all. "The fee in question was not aimed at replacing lost revenue. It is triggered by the voluntary action of the developer to construct something and directly tied to an increase in ridership generated by new development."
Here's an example of a fee which did not pass judicial muster. Bixel v. City of Los Angeles (1989) 216 Cal.App.3d 1208 illustrates the pitfalls of attempting to assign equitable fees to new development. Los Angeles charged Bixel Associates a fire hydrant and water main fee as a condition of issuing the building permit for a high rise office. Los Angeles had devised a formula for calculating such fees that was based on the ratio between the total amount that the city had spent for hydrants and water mains over a two year period and the value of work performed under building permits issued during that period.
The California Court of Appeal invalidated the city's fee ordinance,
finding that the city's method of setting this fee failed to distinguish
those costs which were solely attributable to new construction from those
relating to routine repairs and maintenance. In addition, the fee ordinance
did not expressly limit the use of fee revenues to improvements required
by new development. As a result, the city could not demonstrate its compliance
with the crucial principles that: (1) fees bear a reasonable relationship
to the cost of the improvements necessitated by new development and (2)
fees not be used for general revenue purposes.
The Nollan and Dolan Decisions
The U.S. Supreme Court holding in Nollan v. California Coastal Commission (1987) 107 S.Ct. 3141 has established that the power to impose exactions on development is not without limits. The U.S. Constitution guarantees that private land will not be taken without just compensation. This prohibition includes regulatory takings or inverse condemnation. An exaction will not be allowed to result in a taking. A legally defensible exaction must: (1) "advance a legitimate state interest" (such as protection of the public health, safety, and welfare); and, (2) mitigate the adverse impacts to that interest that would otherwise result from the project. An exaction may be imposed even if the development project itself will not benefit from it, when it is necessitated by the project's impacts on identifiable public resources. At least one view of the Nollan decision holds that exactions may only be required where the local government would otherwise be empowered to deny approval of the project.
The Nollan decision does not prohibit local governments from imposing impact fees or dedications as conditions of project approval. It does, however, require that government establish the existence of a "nexus" or link between the exaction and the state interest being advanced by that exaction. Once the adverse impacts of a project have been quantified, the local government must then document the relationship between the project and the need for the conditions which mitigate those impacts. This link may be forged by general plan policies or by special ordinances that are based upon studies or other objective evidence. Adoption of detailed findings, supported by evidence in the hearing record, is crucial to the enactment of a legally defensible fee ordinance.
AB 1600 of 1987 (Chapter 927) provides valuable guidance in this area by creating a statutory nexus requirement (Gov. Code sections 66000 et seq).
More recently, in Dolan v. City of Tigard (1994) 114S.Ct. 2309, the U.S. Supreme Court has held that in addition to the Nollan standard of an essential nexus, there must be a "rough proportionality" between proposed exactions and the project impacts that the exactions are intended to allay. The Dolan case focused on an administrative permit for expansion of a small plumbing and electrical supply business which was conditioned upon dedication of a bike lane and a storm drainage easement along an existing drainage channel. The Court overturned both exactions, holding that the city's conclusory findings were not specific enough to support the dedications.
Where Nollan established that there must be a nexus between the exaction and the state interest being advanced, Dolan added a second step to the analysis of exactions - there must be a "rough proportionality" between the exaction and the impacts of the project.The Dolan court offered this advice:
"We think a term such as 'rough proportionality' best encapsulates what we hold to be the requirements of the Fifth Amendment. No precise mathematical calculation is required, but the city must make some sort of individualized determination that the required dedication is related both in nature and extent to the impact of the proposed development."
As in the Nollan case, the lesson to be learned is that public
exactions must be carefully documented and supported. Many common exactions,
such as street dedication, curb and gutter improvements, parks, and open
space, will probably be able to meet the requirements of Nollan since
they can be directly related to project impacts that would otherwise necessitate
denial of the project. Whether all of these may withstand the stricter test
created by Dolan is the question of the hour. Other, more exotic
exactions, such as affordable housing, public art, and child care may be
more difficult to impose if the local government cannot tie them directly
to the impacts from the project. Some commentators believe that under the
Nollan standard, exactions requiring the conveyance of land (dedications)
may be subject to greater judicial scrutiny than fee exactions. In any case,
dedications will be examined closely to determine whether they constitute
impermissible "takings" without just compensation.
The Ehrlich Decision
The California Supreme Court clarified the Nollan and Dolan principles when it decided Ehrlich v. City of Culver City 12 C4th 854 in 1996. For over 20 years, Ehrlich owned a private tennis facility allowed under a specific plan and zoning approved by the city. When Ehrlich sought city approval to demolish the facility and replace it with luxury condominiums, an action which required rezoning the property and rescinding the specific plan, the city balked. After a period of dispute, the city eventually approved Ehrlich's proposal, subject to conditions including a recreational mitigation fee of $280,000 imposed ad hoc to enable the city to replace the loss of the tennis courts and a $33,200 in-lieu fee imposed under the city's "Art in Public Places" ordinance. Ehrlich challenged the constitutionality of these fees, alleging that there was no "essential nexus" (as required by Nollan) for imposing either aesthetic requirements or recreation mitigation fees on the project and that the fees being imposed were not "roughly proportional" to the impact of his project (the higher level of scrutiny required by Dolan).
The California Supreme Court's decision allowed both Ehrlich and Culver City to claim some element of victory. The court made two key points:
(1) Developers who wish to challenge a development fee on either statutory or constitutional grounds must do so under provisions of the Mitigation Fee Act (Government Code section 66000, et seq.).
(2) The two part Nollan/Dolan test applies only to ad hoc fees and dedications of land (as opposed to legislatively-enacted fees). The "rough proportionality" component does not apply to legislatively-enacted fees such as Culver City's Art in Public Places (here the court also held that this ordinance enacted to enhance aesthetics was a reasonable use of the city's police power under Nollan).
The California Supreme Court has distinguished between the imposition of legislatively-enacted and ad hoc fees. The ad hoc recreational mitigation fees, developed for this specific project and applied as a condition of approval, were subjected to a higher level of scrutiny (i.e., application of both Nollan/Dolan principles) than the legislatively-enacted art in public places fees, which were developed for general application. As Justice Mosk noted in his concurring opinion, greater scrutiny is needed so that the court may ensure that "the developer is not being subject to arbitrary treatment for extortionate motives. These singular fees present a greater possibility that the government is unfairly imposing disproportionate public burdens on a lone, and therefore particularly vulnerable, property owner."
Since the Ehrlich decision, the Legislature has amended the Mitigation Fee Act (Government Code section 66000, et seq.) to specify that its requirements apply to both legislatively-enacted and ad hoc fees (Government Code sections 66000 and 66020). Compliance with the Act should inoculate cities and counties from successful challenge under the Nollan/Dolan test.
The courts continue to clarify the Nollan and Dolan holdings.
In Loyola Marymount University v. Los Angeles Unified School District
(1996) 45 Cal.App.4th 1256, a California court of appeal held that the two-part
Nollan/Dolan test did not apply to a school impact fee that was imposed
on the basis of the state school impact fee law (Government Code Sections
53080 and 65995).
In 1987, at almost the same time that the U.S. Supreme Court was handing down its decision in the Nollan case, the California Legislature approved AB 1600 (Chap. 927, Stats. of 1987), a bill requiring local agencies to establish a "nexus" or link between the fees being exacted and the needs created by the project paying the fees as well as to account for the ultimate use of any fees. These requirements and subsequent amendments are codified at sections 66000 et seq. of the Government Code.
By its own terms, the Mitigation Fee Act applies to development impact fees imposed by local agencies to finance all or part of the cost of public facilities (such as streets, traffic signals, bridges and major thoroughfares, drainage and flood control facilities, water and sewer, and government buildings). These requirements do not apply to taxes or special assessments (which are not fees), Quimby Act fees, processing fees, fees collected under a development agreement, or certain fees collected by redevelopment agencies. "Local agency" is defined to include counties, cities, special districts and school districts (Government Code section 66000 (c)).
Whenever establishing, imposing, or increasing a fee "as a condition of approval of a development project," the local agency imposing the fee must identify the purpose of the fee and the use to which it will be put. The local agency must also specify the nexus between the development project (or class of project) and the improvement being financed (Government Code section 66001). It must further establish that the amount of funds being collected will not exceed that needed to pay for the improvement (Government Code section 66005).
Revenues resulting from such fees must be kept and administered in a separate account or fund dedicated to the public improvements being financed and must not be commingled with other revenues and funds of the local agency (Government Code section 66006). In addition, five years after the first deposit into the account or fund, the local agency must make specific findings regarding any unexpended funds, whether those funds are committed to expenditure or not (Government Code section 66001). The same findings must continue to be made once every five years thereafter. If these findings are not made, statute requires the agency to refund the fees to the current owner of the affected property. Refunds may be made by direct payment, temporary suspension of fees, or "other reasonable means," at the discretion of the local agency.
In its findings under section 66001, the agency must:
(1) identify the purpose to which the fee is put;
(2) demonstrate a reasonable relationship between the fee and purpose for which it is charged;
(3) identify all sources and amounts of funding anticipated to be used to finance the incomplete improvements; and
(4) designate the approximate dates on which the above funding is expected to be deposited into the appropriate account or fund.
The following discusses some of the other aspects of these statutes.
Within 180 days of the end of each fiscal year, the agency must make the following information available:
(1) a brief description of the type of fee in the account;
(2) the amount of the fee;
(3) the beginning and ending balance of the account;
(4) the fees collected that year and the interest earned;
(5) an identification of each public improvement for which the fees were expended and the amount of the expenditures for each improvement;
(6) an identification of an approximate date by which construction of the improvement will commence if the local agency determines that sufficient funds have been collected to complete financing of an incomplete public improvement;
(7)a description of each inter-fund transfer or loan made from the account or fund, including the public improvement on which the transferred or loaned fees will be expended, the date on which any loan will be repaid, and the rate of interest to be returned to the account; and
(8) the amount of money refunded under section 66001.
The public agency must review the fiscal report at its next scheduled public hearing after public release of the report. Section 66006 specifies the requirements 15-day advance public notice.
When a project involves more than one dwelling, the local agency can determine whether: (1) the fee is to be paid in a lump sum when the first residence receives its final inspection or certificate of occupancy; (2) the fee is to be paid on a pro rata basis when a certain percentage of the dwellings have received their final inspection or certificate of occupancy; or (3) the fee is to be paid on a pro rata basis for each dwelling as it receives its final inspection or certificate of occupancy.
Fees may be collected before the final inspection or certificate of occupancy stage if the local agency determines that:
(1) the fees will be collected for an improvement or facility for which an account has already been established and funds appropriated and the local agency has adopted a proposed construction schedule or plan for the project (i.e., a capital improvement plan or five-year school facilities plan; or,
(2) the fees are to reimburse the agency for expenditures it has already made.
Section 66007 does not apply to fees collected to cover the cost of code enforcement or inspection services.
Other pertinent fee statutes include:
Public Resources Code section 21004 limits mitigation measures to those which may be imposed by authority separate from the California Environmental Quality Act (CEQA). The local subdivision ordinance is an example of such an independent authorization for imposing exactions. CEQA itself provides no authority to impose fees or dedications.
Government Code section 50030 provides that no permit fee imposed by a city or county for the placement, installation, repair, or upgrading of telecommunications facilities (lines, poles, or antennas) by a telephone corporation that has obtained all necessary authorizations from the California Public Utilities Commission and the Federal Communications Commission may exceed the cost of providing the service for which it is charged, nor be levied for general revenue purposes.
Government Code section 65913.8 prohibits the use of fees imposed as
a condition of development project approval to pay for maintaining and operating
the infrastructure built with those fees. This statute offers two exceptions
to its own rule for small developments where formation of a maintenance
district is impractical or where maintenance is only to be funded during
a temporary period while a maintenance entity is being formed.
Section 66411.1 of the Map Act limits the improvements that may be required of a subdivision of five or fewer lots to the dedication of rights-of-way, easements, and the construction of offsite and onsite improvements. Installation of the improvements is not required until a permit is required for development of the new parcel or until construction is required under a schedule agreed upon by the jurisdiction and the subdivider. This limitation does not apply to Quimby Act exactions.
All or a portion of any land which has been dedicated in fee for public purposes (including public improvements and facilities, but not open space, parks or schools) is subject to reconveyance to the subdivider if, upon the request of the subdivider, the local agency determines that the public purpose for which all or a portion of the land was originally dedicated no longer exists or the property is not needed for public utilities (Government Code section 66477.5). Further, upon subdivision map approval, local agencies must attach a certificate to the approved map which states the name and address of the subdivider who is dedicating the land, a legal description of the dedicated land, and notice that reconveyance will be made under the circumstances described above. The reconveyance requirement applies only to land which was required to be dedicated on or after January 1, 1990.
The Map Act also creates a procedure for protesting dedications alleged to be excessive. Government Code section 66475.4 provides that a subdivider may bring suit against the local agency to determine whether a dedication "is not reasonably necessary to meet public needs arising as a result of the subdivision." This section does not apply to in-lieu fees. When a dedication is found to be excessive, the local agency must either:
(1) require redesign of the subdivision;
(2) pay compensation for the excessive portion of the dedication; or,
(3) require redesign of the subdivision to delete or modify the excessive dedication.
Many of the service fees levied by local government are authorized by state enabling statutes. For example: waste disposal sites and services within county service areas under Government Code section 25210.77(e); water service connection charges under Water Code section 22281.1; and city sewer service or immediate availability charges under Government Code section 38902.
The local government's legislative body may impose fees for services only after a noticed public hearing. Pursuant to Government Code section 66014 et seq., when a local agency charges fees for zoning changes, zoning variances, use permits, building permits, building inspections, filing of applications for annexation or related reorganizations, subdivision maps, or planning services "those fees shall not exceed the estimated reasonable cost of providing the service for which the fee is charged." Fees which exceed the reasonable cost are considered special taxes and must be submitted to the jurisdiction's voters for a two-thirds vote approval. Water connection, sewer connection, and capacity charges are similarly limited under section 66013. The amount of the fee must be based upon a needs study or other evidence in the hearing record so that its reasonableness can be ascertained (Beaumont Investors v. Beaumont-Cherry Valley Water District (1985) 165 Cal.App.3d 227).
The Legislature approved a measure statutorily overturning the San Marcos Water District v. San Marcos Unified School District (1986) 42 Cal.3d 154 discussed earlier. Pursuant to Government Code sections 54999-54999.6, any public agency which has been providing public utility service may charge another agency a capital facilities fee or capacity charge to pay the capital cost of a public utility facility. However, new fees may only be imposed on state agencies, schools, and state colleges and universities under cooperative agreement with such agencies (section 54999.3). These fees and charges may be subject to Proposition 218, depending on the service being provided.
Proposition 218 has amended the State Constitution to state that "property related" fees and all standby charges may be imposed only upon voter approval. Although its provisions are not always reflected in statute, bear in mind that any statutory law or regulation which conflicts with Proposition 218 is null and void.
Under the express terms of the initiative, no fee or charge can be imposed or increased unless it meets all of the following requirements:
Further, Proposition 218 prohibits levying property related fees to pay for general governmental services, such as police, fire, ambulance, or library service which are available to the public at large; services which are not used by or immediately available to the property owner; and programs unrelated to the property related service. The initiative requires the repeal of all nonconforming fees by July 1, 1997.
Proposition 218 defines a fee or charge as "any levy other than an ad valorem tax, a special tax, or an assessment, imposed by an agency upon a parcel or upon a person as an incident of property ownership [including tenants who are directly responsible for paying the fee or charge]" (Section 2(c) and (g), Article XIII D, California Constitution). It requires property owner approval of property related fees and charges, with the exception of fees and charges for sewer, water, and refuse collection services. Standby charges and charges for future services are now classified as special assessments (Section 6, Article XIII D, California Constitution). They can only be levied in accordance with the rules for special assessments described in Chapter III.
In order to impose (or in the case of existing fees, increase) property related fees and charges, the jurisdiction must:
The election process for fees and charges differs in several respects from the process required for special assessments. First, the public hearing on the fees or charges is separated from the ballot by at least 45 days. For special assessments, the ballots are compiled at the public hearing. Second, a proposed fee or charge may be killed before going to ballot if a majority of the affected property owners submit written protests at the public hearing. Killing a proposed special assessment requires the return of formal ballots. Third, a jurisdiction proposing or increasing a fee or charge may place the question before either of two electorates: affected property owners (simple majority necessary for approval) or all voters residing within the area subject to the fee (two-thirds majority necessary for approval). A special assessment election is limited to affected property owners. Fourth, fees or charges for sewer, water, and refuse collection services are subject to public hearing and majority protest requirements, but not a protest ballot. After July 1, 1997 all special assessments will be subject to the voting requirements.
As with taxes and assessments, property related fees and charges are subject to repeal or reduction by voter initiative.