City of South San Francisco - File #: 20-612

• File #: 20-612
• Type: Staff Report
• Status: Public Hearing
• File created: 8/31/2020
• In control: City Council
• On agenda: 9/23/2020
• Title: Report recommending the adoption and/or amendment of ordinances and resolutions related to various Development Impact Fees. (Janet Salisbury, Director of Finance)
• Related files: 20-690, 20-677, 20-678, 20-679, 20-680, 20-685, 20-681, 20-682, 20-683

Title

Report recommending the adoption and/or amendment of ordinances and resolutions related to various Development Impact Fees. (Janet Salisbury, Director of Finance)

Label

RECOMMENDATION

Recommendation

It is recommended that the City Council hold a public hearing to introduce proposed updates to the City of South San Francisco Development Impact Fees. Staff also recommends that the City Council waive further reading and introduce five (5) ordinances and adopt four (4) resolutions to adopt or amend Development Impact Fees, as described in this report.

Body

EXECUTIVE SUMMARY

The City of South San Francisco, as authorized by the Mitigation Fee Act (Government Code 66000, et seq.), imposes impact fees on new development projects in order to mitigate the impacts caused by new development on public services, infrastructure, and facilities. Currently, the City has the following impact fees in place:

1.                     Parks and Recreation Impact Fee comprised of:

a.                     Parkland Construction Fee

b.                     Parkland Acquisition Fee

2.                     Childcare Impact Fee

3.                     Bicycle and Pedestrian Impact Fee

4.                     Police Impact Fee and Fire Impact Fee (together known as the “Public Safety Impact Fee”)

5.                     Oyster Point Interchange Impact Fee

6.                     East of 101 Traffic Impact Fee

7.                     East of 101 Sewer Impact Fee

8.                     Sewer Capacity Fee

9.                     Commercial Linkage Fee

This report will review the following:

A.                     Establishment of a new Citywide Transportation Impact Fee. If approved by Council, this would result in the establishment of a new impact fee and would also result in the suspension of the East of 101 Traffic Impact Fee and the Bicycle and Pedestrian Impact Fee collections. Related to this item, Council would be taking the following actions:

•                     Waive further reading and introduce Ordinance codifying the establishment of a Citywide Transportation Impact Fee.

•                     Adopt Resolution adopting a Citywide Transportation Impact Fee. The Resolution sets the amounts of the fee and the details of the fee program.

B.                     Establishment of a new Library Impact Fee. If approved by Council, this would result in the establishment of a new impact fee. Related to this item, Council would be taking the following actions:

•                     Waive further reading and introduce Ordinance codifying the establishment of a Library Impact Fee.

•                     Adopt Resolution adopting a Library Impact Fee. The Resolution sets the amounts of the fee and the details of the fee program.

C.                     Update to the Childcare Impact Fee. This would result in changing the existing Childcare Impact Fee levels. Related to this item, Council would be taking the following actions:

•                     Waive further reading and introduce an Ordinance amending the provisions of the Municipal Code related to the Childcare Impact Fee.

•                     Adopt a Resolution amending a Childcare Impact Fee. Going forward, the Resolution will set the amounts of the fee and the details of the fee program, making them easier to amend in the future.

D.                     Update to the Public Safety Impact Fee. This would result in changing the existing Public Safety Impact Fee levels. Related to this item, Council would be taking the following actions:

•                     Waive further reading and introduce an Ordinance codifying the existence of the Public Safety Impact Fee.

•                     Adopt a Resolution amending the Public Safety Impact Fee.

E.                     Repeal of the Landscaping In-Lieu Fee. This would result in the elimination of the currently existing in-lieu fee. Related to this item, Council would be taking the following action:

•                     Waive further reading and introduce an Ordinance amending the South San Francisco Municipal Code to repeal the Landscaping In-Lieu Fee

BACKGROUND

The review and recommended updates to the City’s developmental impact fee was a multi-departmental effort and involved three major studies:

1.                     Development Impact Fee Study led by Matrix Consulting Group (“Matrix”). Council approved a resolution on August 28, 2019 to contract with Matrix to conduct a comprehensive review of certain impact fees of the City. This study was conducted to ensure that the City complies with the legal authority for the collection of certain impact and in-lieu fees going forward. This study can be found as Exhibit A to the resolutions associated herein related to the TIF, Library Impact Fee, Childcare Impact Fee or Public Safety Impact Fee. It is important to note that while the study (Exhibit A of the resolutions) provides the nexus criteria and fee calculation for all four of the discussed impact fees (TIF, Library, Childcare and Public Safety), Matrix led the analysis on the Library, Childcare and Public Safety Impact Fees only. 

2.                     Transportation Impact Fee Analysis led by DKS Associates (“DKS”). The nexus and fee basis related to the establishment of a TIF citywide was led by DKS. The results of this study can found as Appendix C to the above Developmental Impact Fee Study developed by Matrix. Please refer to Exhibit A - Appendix C of the resolutions associated with this report for the TIF Analysis.

3.                     Feasibility Study of Fee Levels led by Century Urban, LLC (“Century Urban”). This study was conducted to understand the feasibility of adjusting existing fees and assessing new fees based on the current development environment. The analysis provided by Century Urban supports staff recommendations to set impact fees at rates that will not necessarily hinder future development but aim to strike a balance to ensure that new development pays their “fair share” to mitigate impacts of the new development on city infrastructure. This study can be found as Attachment 1 of this staff report.

The first two studies above essentially address the legal requirements for demonstrating that the proposed fee amounts are no greater than and proportional to the  the cost of capital facilities and equipment required to serve new development and growth in the City. As discussed in the study, impact fee revenue cannot be collected or used to cover deficiencies in existing City capital equipment and facilities. The portion of capital costs required to meet the needs of the City’s existing population must be funded through other sources. Development impact fee funding therefore is necessary to augment other revenue sources to meet overall funding requirements to maintain service levels as new development places greater demand on City infrastructure, facilities, and equipment. Further, impact fees must be based upon a reasonable nexus, or connection, between new growth and development and the need for new capital facility or improvements, or equipment and/or replacement. As such, an impact fee must be structured such that revenue generated does not exceed the cost of providing the facility or equipment for which the fee is imposed. Examples of expenditures of impact fee revenues include the purchase of new library collection materials, purchase of new fire and police vehicles, or expansion of childcare facilities.

There are two commonly used methodologies for calculating impact fees - service level standards and specific facility projections. Matrix, the City’s impact fee consultant, recommended and staff agreed to use the service level standards approach. The service level standard calculates the impact of each individual on the City’s infrastructure and applies it to future individuals and growth. This approach assumes that as there is an increase in the population, there is a corresponding impact on City infrastructure. This is the nexus established allowing for the collection of impact fees that offsets the impact of new development.

For purposes of calculating the proposed TIF, Library, Childcare and Public Safety Impact Fees, the consultants reviewed a variety of data from state, regional, and county organizations, as well as from City staff. The data analysis included:

•                     Ordinances: The consultant reviewed the City’s existing impact fee ordinances to ensure legal authority to assess and increase the fees.

•                     General Plan, Facilities Assessment, Department Master Plans, and CIP Plans: Data was reviewed from a variety of City-specific documents regarding potential growth in the community, the City and its various Departments’ goals, and future capital projects.

•                     Growth Projection Data: Population, household size, dwelling units, and employment information for current and future years was obtained from the U.S. Census Bureau, the in-progress Shape SSF General Plan 2040, as well as from the Association of Bay Area Governments (ABAG). It should be noted that some of the growth projections used in the impact fee analysis reflect current conditions in South San Francisco, and the growth the City anticipated by Economic and Community Development staff just shortly before the COVID-19 pandemic began.

•                     Service Level Standards: Information such as child care spaces, library collection items, and fire and police facilities square footage per capita were collected, reviewed, and used to calculate anticipated future needs.

•                     Revenues and Expenses: Revenue collected from existing impact fees was reviewed to ensure compliance with reporting practices. Expense information was reviewed to estimate the cost of recently-completed infrastructure, as well as to calculate an appropriate percentage for administrative overhead. 

OVERVIEW OF RECOMMENDED FEE LEVELS

The Development Impact Fee Study led by Matrix (please refer to Exhibit A of the associated resolutions to this report) provides the framework for recommendations on the establishment of new and/or update of existing impact fees. This study includes the maximum reasonable fees for each of the two newly proposed fees (TIF and Library) and the updates to existing fees (Childcare and Public Safety). Attachment 2 of this report shows the current, full cost and recommended fee levels for all of the City’s Impact Fees. For many of these fees, staff has recommended fees be set below the maximum legal limit. In establishing a recommended rate for each fee, staff examined the existing and maximum justifiable fees, then adjusted the recommended fee levels to balance our City priorities, while either keeping the total fee burden in line with comparable jurisdictions or within a financially feasible range of development. Staff believes the recommended fees will result in a meaningful increase in funding for critical City infrastructure, while being conservative enough to not substantially impact the development pipeline.

In setting the recommended fee levels, staff analyzed four development prototypes: (1) a 180-unit multi-family rental building, (2) a 150,000 square foot research and development (“R&D”) facility, (3) a 120-room, 60,000 square foot hotel, and (4) a 60,000 square foot industrial warehouse. The results of this developmental prototypes analysis are shown also in Attachment 2 of this report (please refer to the pages showing the various pie charts). The Impact Fee Analysis Review/Feasibility Study by Century Urban (Attachment 1 of this report) supports the recommended fee levels by showing that the recommended fee levels do not negatively hinder developmental growth in the area. The following are summary results of two of the prototypes examined: R&D and Rental Housing.

R&D Prototype

Century Urban studied a 150,000 square foot prototype R&D development, using pre-COVID construction costs and rents. Although we believe economic conditions to be quite different now than they were prior to the pandemic, there is no reasonable way to assess what the current market conditions do to project feasibility. Staff believes it is reasonable to continue with the pre-COVID assumptions, as R&D development activity in South San Francisco has not fallen off since the start of the pandemic.

A common metric for determining a project’s feasibility is calculating its stabilized return on cost. Return on cost is calculated by estimating the annual pro-forma net operating income and dividing it by the estimated total project development cost. The return on cost a project targets is dictated by the project’s perceived risks including the uncertainty of project costs, future rents, duration of construction, and economic conditions upon completion. Based on research into typical returns on cost for active R&D projects in South San Francisco, Century Urban determined the prototype R&D development would likely be feasible if its return on cost fell between 6.5% and 7.0%.

Assuming the City’s existing fees, the prototype’s return on cost is 7.14%. This is above the feasible range, meaning this development would be very likely to proceed. When the City’s fees are adjusted to the levels recommended by staff, the return on cost decreases to 6.77%, still well within the range of feasibility. What this indicates is that the R&D development pipeline is unlikely to be greatly impacted by the increase in fees.

Rental Housing Prototype

Century Urban studied a 180-unit prototype multi-family, rental housing development, using pre-COVID construction costs and rents. Like with the R&D prototype, staff felt it was acceptable to use pre-COVID conditions and to use return on cost as a measure of feasibility. The target return on cost for a project like this in South San Francisco is 5% and above.

For comparison purposes, Century Urban looked at rental housing feasibility in 2018 - when the City’s inclusionary housing ordinance was adopted, imposing an affordable housing requirement on developers - compared to today. In 2018, the rental housing prototype was infeasible, with a return of just 3.93%. Council wrestled with the decision to implement an inclusionary requirement it knew could deter some development. Ultimately, Council decided to ramp up the inclusionary requirement over two years, to allow the market to adjust. With the staff recommended fee levels, the return on cost of the rental housing prototype falls to 3.5%.

What this analysis indicates is that the increase in fees may impact the feasibility of some rental housing developments. Site specific characteristics like zoning, prior use, contamination (or lack thereof), size, and proximity to transit will allow for some projects to reach a targeted return on cost and proceed; however, projects that were marginally feasible already may be adversely impacted by higher fees.

Finally, Century Urban reduced the impact fees in its prototype development to $0 and found that the development remained just below the feasibility threshold, with a return on cost of roughly 3.75%. What this affirms is that other economic conditions play a larger role in feasibility - namely rent, construction costs, and site-specific characteristics.

DISCUSSION ON NEW IMPACT FEES - TIF AND LIBRARY

City Council is being asked to approve the adoption two new impact fees to the City: (A) Transportation Impact Fee and (B) Library Impact Fee.

A.                     TRANSPORTATION IMPACT FEE (TIF)

Background

The East of 101 Traffic Impact Fee Nexus Study was originally conducted in 2001 and adopted by the City Council in 2002.  The study identified the need for new and expanded roadway and intersection improvements to serve the area located east of US 101 in the City of South San Francisco. The fee enacted policies requiring that new development within the East of 101 area pay toward upgrades to existing transportation infrastructure and construction of new transportation facilities necessitated by new development in the East of 101 area. When first adopted, the East of 101 Traffic Impact Fee sought to fund the infrastructure needs of residents, businesses, and employees through build-out under the adopted 1999 General Plan and to determine the amount of fees necessary to generate funds to pay for the transportation improvements. However, it is apparent that the continued growth and development throughout the City has created traffic impacts beyond the East of 101 geographical limits.

In 2017, the City Council adopted the Bicycle and Pedestrian nexus study. The Bicycle and Pedestrian Impact Fee Program is intended to augment funding for bicycle and pedestrian improvement projects necessitated by development-generated increased demand.

In December 2019, the City tasked on-call consultant DKS to determine a proposed Citywide TIF. The TIF establishes a fee structure in order to fund transportation infrastructure improvements necessary to mitigate increased traffic resulting from new development. The proposed Citywide TIF will replace the East of 101 Traffic Impact Fee and the citywide Bicycle and Pedestrian Impact Fee. The proposed Citywide TIF expands the geographic area in which the city collects and spends money on transportation-related infrastructure, including vehicle, pedestrian, and bicycle transportation.

Proposed/New TIF

The proposed TIF will replace the East of 101 Traffic Impact Fee and the Bicycle and Pedestrian Impact Fee and will apply to all new development in South San Francisco. The nexus analysis uses standard trip generation rates by land use category to account for variations in travel demand among land uses. Trip generation rates by land use category reflect either the origin or destination of a trip and are a reasonable measure of the desire for mobility by residents and workers to access homes, jobs, shopping, and other activities. This approach establishes a relationship between the type of development and the fees necessary to maintain transportation infrastructure in support of the development.

Below is an example of the mitigation projects the fee could be used to fund. The list of projects should be reviewed regularly by Council to prioritize staff time and resources.

The fund balance for the East of 101 Traffic Impact Fee was $24,250,000 at the end of Fiscal Year (FY) 2019-2020. Of that, approximately $22,500,000 has been earmarked for projects in the next two years. Staff will bring back qualifying projects for Council direction to spend the remaining $1,750,000. The current fund balance for the Bicycle and Pedestrian Impact Fee is $63,538.

Mobility 2020 currently includes approximately $512,000,000 of unfunded projects. By approving the proposed citywide TIF in place of the East of 101 Traffic and Bicycle and Pedestrian impact fees, the City will be in a better position to fund priority projects to ease traffic congestion and improve multi-modal transportation throughout the entire City. The new TIF will supersede the existing East of 101 Traffic Impact Fee and the Bicycle and Pedestrian Impact Fee. The action by City Council includes legislation to rescind the existing fees. Money that has already been collected pursuant to the two existing fees will remain in the restricted funds that were created for those fees and eligible for the permissible uses for each fee. The new fee is broader but encompasses projects eligible for funding by the two existing fees. With this new fee, the City will continue to accumulate funds for the types of projects intended to be funded by the existing fees.

Shown below shows the proposed fee levels for the TIF across the various development categories:

B.                     LIBRARY IMPACT FEE

The Library Fee is newly proposed and had not been previously studied. Matrix worked with City staff to calculate a library impact fee for new development to pay their proportionate share of replacing and rehabilitating library materials and facilities. The purpose of the newly proposed fee is to expand existing library branches and acquire additional space and collection items to continue providing the existing level of service to the community.

The Library has detailed capital improvement plans that outline the utilization of this proposed fee revenue to ensure there is appropriate expansion of library facilities, including technology within the library, to meet community goals and objectives and meet demand as growth continues. The City will need additional library space and collection materials as its population grows. Below is a description of projects the new fee may fund:

The table below shows the proposed fee levels across the various development categories:

DISCUSSION ON UPDATES TO EXISTING IMPACT FEES - CHILDCARE AND PUBLIC SAFETY

In addition to two new impact fees discussed above, City Council is also being asked to approve updating the impact fees related to (A) Childcare and (B) Public Safety.

A.                     UPDATE TO CHILDCARE IMPACT FEE

The Childcare Impact Fee was developed and implemented in 2001 to help mitigate the impact of new development upon the need for future childcare spaces. The City has annually increased these fees per the original resolution in 2001 and the municipal code in 2002 to help account for increased construction costs. The current fund balance for the Childcare Impact Fee is $5,527,397.

The table below shows the current fee levels and the proposed fee level for the Childcare Impact Fee:

Revenues raised by the fee are used to establish new childcare spaces. Methods for creating new childcare spaces include: building new facilities; expanding existing facilities; leasing existing commercial space or partnering with the School District; and establishing new family childcare homes and expanding spaces at existing family childcare homes.

B.                     UPDATE TO PUBLIC SAFETY IMPACT FEE

The Public Safety Impact Fee was adopted by City Council in 2012. At the time, the nexus study identified the need for new and expanded public safety facilities and equipment to support new development throughout the City. The current Fee includes an annual inflation adjustment and a 2% administrative fee. The fund balance for the Public Safety Impact Fee is $1,404,106. While not fully encumbered, $103,275 of that has been earmarked this fiscal year for routine handgun replacements and another $1,000,000 is earmarked for the completion of the new Police Station.

The Police and Fire Departments serve residents, employees, and visitors to South San Francisco.  Future development will result in the need for an expanded public safety infrastructure.

DISCUSSION ON REPEAL OF LANDSCAPING IN-LIEU FEE

Aside from the above, staff recommends that the City Council approve the repeal of the cultural arts/landscaping in-lieu fee. This fee is an option for some development projects to pay when applicable landscaping requirements cannot be fully met

The City currently has on its Master Fee Schedule a Cultural Arts/Landscaping In-Lieu Fee. Due to various circumstances, the fee has not been paid by a qualifying development project in the last 10 years. Zoning regulations, for example, have changed so significantly within the last decade growth has been so robust within the local economy that it is extremely rare for a project to be unable to meet is landscaping requirements and therefore able to pay the fee to partially meet those requirements. As a result, staff recommends that the City Council eliminate this fee. Attachment 3 to this report is a memorandum from Matrix, the City’s fee consultant, detailing the history of the in-lieu fee establishment and the current issues related to its collection.

Staff is currently in the early stages of studying the establishment of a new “Public Art In-Lieu Fee”, which will be brought to the Council at a future date. The new public art in-lieu fee, if established, would entail a more relevant nexus for establishing fee collections for the purposes of enhancing the City’s public art footprint.

TIMELINE AND NEXT STEPS CONSIDERATIONS

The proposed impact fees have been presented to via public meetings on four previous occasions this year. On July 27^th and August 3^rd, the items discussed herein were presented to the Budget Standing Committee. On August 12^th and August 26^th, the members of the City Council were also updated on these fees via two study sessions.

If these five (5) ordinances and four (4) resolutions associated to this staff report is approved by City Council, the impact fees for non-residential development would go into effect relatively immediately. The ordinances will go into effect 30 days after second reading and adoption at a subsequent meeting. Per the enclosed resolutions, the impact fees for non-residential developments would go into effect 60 days from this first public hearing. The impact fees for residential development would go in effect January 1, 2022. Further, in approving the legislation herein, beginning on July 1, 2021 and each July 1 thereafter, these fees would increase per the Engineering New Record Construction Cost Index (“CCI”) or by the Consumer Price Index (“CPI”) depending on the fees. The repeal of the Landscaping In-Lieu fee would be in place within 30 days and second reading and adoption of the ordinance

Once the Shape SSF General Plan 2040, which is still in-development, is adopted by City Council, the City’s impact fees may be reviewed again to determine that the fee amounts remain reasonably related to the impacts of anticipated development within the City of South San Francisco. The City Council may revise the Developer Impact Fees to incorporate findings and conclusions of further studies and any standards in the General Plan, as well as increases due to inflation and/or increased construction costs.

FISCAL/POLICY IMPACT

The Development Impact Fee Report provided in Exhibit A to the resolutions provide details on the types of infrastructure and services that the City would be able to fund with the proposed impact fees.

The approval of these impact fees would have a positive fiscal impact as it will provide for the appropriate collection of development impact fees to support the additional services and/or infrastructure needed resulting from new development. Impact fees are a system for new development to pay their “fair share”. These levels will ensure that the City can continue to provide the levels of service to future populations that the current community has come to expect in South San Francisco.

RELATIONSHIP TO STRATEGIC PLAN

Adoption of the updated development impact fees will ensure the costs of capital facilities and infrastructure for new development are covered, supporting the City’s strategic initiative to pursue financial stability to support City operations.

CONCLUSION

The Development Impact Fee Report provided by Matrix concludes that the City is currently under-recovering development impact fees. Staff recommends that the City Council waive further reading and introduce 5 ordinances and adopt resolutions.

Attachments:

1.                     Impact Fee Analysis Review/Feasibility Study by Century Urban

2.                     FY 2020-21 Proposed Development Impact Fees

3.                     Cultural Arts/Landscaping In-Lieu Fee Memo

4.                     PowerPoint Presentation