Loading...
HomeMy WebLinkAbout2002-07-16 City CouncilCity of Palo Alto C ty Mznzger’s Report TO: ATTN: HONORABLE C~TY COUNCIL FINANCE COMMITTEE FROM:CITY MANAGER DEPARTMENTS:ADMINISTRATIVE SERVICES/PLANNING DATE:JULY 16, 2002 CMR: 329:02 SUBJECT: FOLLOW-UP STUDY ON DEVELOPMENT IMPACT FEES REPORT IN BRIEF Since the 1980’s, Palo Alto has imposed development impact fees on new development for its relative share of the cost of specific public facilities and services. Initial fees included a commercial housing-in-lieu fee and a traffic mitigation fee. In March 2002, the City adol~ted ordinances to add new fees for parks, community centers and libraries, and to increase the levels for housing and traffic. At the same time, Council was concerned about the unintended effects such fees might have relative to other City policies, and also wondered whether impact fees might be used to further City efforts in other areas. Council directed staff, to evaluate if impact fees could be structured to promote local-serving businesses, encourage smaller residential units, exempt below- market-rate (BMR) housing from fees, and use traffic impact fees for purpos_es other than intersection improvements. To determine if development impact fees could be structured to further Council policies, staff evaluated the nexus studies to see if differing fee levels could be justified. The nexus studies did not provide data for reducing the fees for retail businesses, nor for increasing fees for larger residential units. However, Council does have the authority to restructure fees based on articulated Council policies. Specific policies in the City’s Comprehensive Plan upon which smaller retail businesses could be exempted from impact fees are identified in this report. Staff also provides the policy details to allow higher fees for new large homes and lower fees for small multi-family units, but recommends against changing the residential fee structure. Staff proposes impact fee ordinances to provide an exemption for all BMR units, to reflect a proposed policy change in the Housing Element of the Comprehensive Plan scheduled for Council consideration in September 2002. Current and proposed impact fee. levels for residential CMR:329:02 Page 1 of 12 and nonresidential development are shown in Attachment 1 to this report. In order to apply traffic impact fees to projects other than those specified in the ordinance, a formal analysis of alternative mitigation measures would be required, either as part of an Environmental Impact Report for the Stanford Research Park area or completion of the citywide transportation study. CMR:329:02 Page 2 of 12 RECOMMENDATION If, after review of the options, the Finance Committee elects to implement changes to development impact fees, staff would recommend that the Finance Committee: 1.Direct staff to prepare ordinances establishing a one-time 1,500 squar.e foot per site exemption from impact fees for new sPace which, by law, can only be used for retail, restaurant, automotive, or personal service 2.Direct staff to continue the exemption for childcare facilities from the housing fee and revise the ordinance for development impact fees for parks, community centers and libraries to exempt new childcare facilities. 3. Direct staff to prepare ordinances exempting all below-market rate (BMR) units from development impact fees, and present the revised ordinances for Council adoption along with the Housing Element of the Comprehensive Plan in September. 4. Direct that an Environmental Impact Report (EIR) for new development in the Stanford Research Park include an analysis of a range of transportation mitigation and traffic cahningmeasures. BACKGROUND On March 25, 2002, Council adopted three ordinances related to development impact fees for Palo Alto. Development impact fees are charges cities impose on new development to cover the capital costs of public facilities and services attributable to the development. The first ordinance established impact fees to cover impacts on parks, community centers and libraries (CMR: 188:02). The second and third ordinances increased the levels of the existing commercial housing in-lieu fee and the transportation impact fee in the Stanford Research ParldE1 Camino Real Zone (CMR:189:02). The new fees and increased fee levels are now being charged to new development as part of the permitting process. Council approved the recommendations of theFinance Committee related to fee levels, policies on exemptions and implementation, and administrative changes. Council members were also interested in further pursuing possible changes to the fee structures in order to further Council policies in related areas. Council directed staff to continue analysis and assessment to determine if fee structure changes could be used to promote local-serving busines’ses, encourage smaller residential units, exempt BMR housing from fees, and use traffic impact fees for other than intersection improvements. Council asked staff to return to the Finance Committee with information on what sort of analysis would be necessary and to request Committee direction if further study or a nexus analysis would be required. CMR:329:02 Page 3 of 12 DISCUSSION Retail businesses No impact fees are charged to existing retail space. Impact fees totaling $18.75 per square foot to cover community services and housing-in-lieu fees are charged to new commercial/industrial/retail development. An additional traffic impact fee of $8.20 per square foot is charged in the Stanford Research Park. Council members and some public speakers were concerned about the effect such fees might have on retail development, specifically for small, neighborhood-serving establishments° Cou~ncil considers local- serving businesses such as small retail a service that plays a vital role in the livabi!ity of Palo Alto and directed staff to evaluate impact fee levels as a way of Supporting this service. Staff reviewed the housing nexus study conducted to establish the initial fee levels to see if small retail operations have less impact on local housing shortages than other types of businesses. (The housing fee makes up 80% of the commercial fee charged to most Palo Alto areas.) While. retail establishments usually have a lower employment density (number of employees per 1000 square feet) than commercial office space, they typically utilize lower-paid employees. This proportionately higher number of lower-paid employees exacerbates the affordability gap for housing in the Palo Alto area (the differential be~tween the cost of purchasing a living unit and the amount of an employee’s income typically available to spend on housing). This, in turn, increases the impact fee necessary to cover retail development’s impact on the City’s housing-in-lieu program. The nexus study results did not provide a basis on which to charge lower impact fees to retail. Council does, however, have the option of exempting specific types of development in order to advance articulated City policies. Staff considered the possibility of an exemption for smaller retail establishments based on Policy B-7 of the Comprehensive Plan: Encourage and support the operation of small, independent businesses. An earlier staff recommendation for a 2,500 square foot exemption was not approved at the February 20, 2002 Finance Committee meeting on the basis that 2,500 square feet was too large, a concern about the cumulative impact of a series of small additions, and the fact that the use of a property might change at a later date. Staff from a number of City departments held extensive discussions to develop a proposal that would advance the Council policy, be fair to developers, and remain feasible to administer. It must be acknowledged that any solution is going to result in charging fees to some developments that Council might hope to exempt and exempting others that should be paying the fees. For example, the City has no basis on which to differentiate between independent "mom and pop" businesses and small outlets of large chain stores. CMR:329:02 Page 4 of 12 One issue that arose is that in most zones and most areas of Palo Alto, ’building owners can switch between neighborhood-serving retail or services to other office uses without City review. Implementing covenants and monitoring programs to enforce the retention of retail would be difficult and timerconsuming, and without a business license registry may be impossible. The City recently adopted an ordinance concerning the protection of certain existing ground floor uses. The ordinance designates protected uses in all CN, CS and CC (Neighborhood, Service and Community Commercial) districts so that once retail, personal service, restaurant or automotive uses receive planning application approval and locate in a ground floor space,, they cannot be converted tO office use. Staff recommends a one-time maximum 1,500 square foot exemption from development impact fees in the CN, CS and CC zones for new or expanded space, which by law cannot be. converted to office uses. This would encourage the .deyelopment of small retail, personal services and restaurants. Any new space in excess of 1,500 square feet would be subject to impact fees on 100% of new square footage. The single exemption per property discourages developers from breaking larger projects into smaller components. To determine the potential impact of such a policy, staff analyzed all development applications with a retail component that were submitted in Palo Alto over the past two years (shown below in Table 1). Out of ten projects, four included retail components of less than 1,500 square feet and thus would be exempt under the proposed exemption. The 1,500 square foot threshold appears to offer a logical distinction between the small retail projects and larger ones that could have a significant impact on City services. 3922 Middlefield 2051 E1 Camino Real 3239 E1 Camino Real 437 Kipling Table 1 Retail Project Proposals in Palo Alto (6/00 to 6/02) Retail Projects UNDER 1,500 s.f. New Retail Retail description Minor addition to Piazza’s Grocery Store in Charleston Center New 3-story building on vacant site, Oak Shadows LLC. New mixed used building to replace demolished building. Addition to historic building to create ground floor retail. square footage 341 511 748 941 Non-Retail square footage None 1,191 s.f. Office plus 2 residential units 2,980 Office 2,153 Office CMR:329:02 Page 5 of 12 451 University 801-809 Alma Retail Projects OVER 1,5(10 s.f. New Retail square footage 1,953 Retail description Apple Computer Store remodel and addition to the mezzanine. ¯ Preliminary review of 3- story building to replace Ole’s Car Shop. 3-Story mixed-use building to replace "The Island". Stanford Shopping Center:Wilkes Bashford Stanford Shopping Center:PF Chang Stanford Shopping Center:Pottery Barn 2,000 Non-Retail square footage None 16,183 s.f. Office plus 2 residential units 4131 E1Camino 5,847 2,080 s.f. Office plus 8 residential units 180 E1 Camino - W 10,000 None 180 E1 Camino - P 10,000 None 180 E1 Camino - V 62,355 None Childcare Council members also expressed a desire that. impact fee exemptions continue for childcareo This use is currently exempt under the housing fee ordinance. Council could elect to exempt child care from other impact fees as well based on Program C-16 of the Comprehensive Plan: Create development incentives.., for employers or developers who include child.., care facilities in the design of new housing and commercial buildings. Size of Residential Units Several Council and community members expressed concern about the substantial size of new and replacement homes being built in Palo Alto and wondered if impact fees might be used to encourage smaller dwellings and denser multi-family units. Impact fees charged to residential development are calculated on a per-unit basis, rather than per square foot. Therefore, a small home and large home pay the same anaount, and a new larger home replacing an existing home pays no fee. The fee levels are based on the demand that each resident places on the City’s parks, libraries and community centers. The original impact fee study did not demonstrate that a replacement home, regardless of size, increases the number Of residents for whom the City provides park, library and community center services. Instead, the study was based on the average number of residents per household. The number of residents relative to dwellingsize was not a part of the analysis. ClVlR:329:02 Page 6 of 12 If a nexus study were performed which demonstrated that larger homes in Palo Alto held more residents than smaller homes, then a higher fee could be justified. Staff analyzed available census data to determine the correlation between the size of single-family homes and number of occupants. (Since home size data by census tract is not yet available for the year 2000, the data used was from 1990.) The data is based on census tracts for different areas of the city, and is included as Attachment 2 to this report. The data does not show a positive correlation between house size and number of occupants for either owner-occupied or rental properties. The 1,400 square foot homes in Fairmeadow have exactly the same number of occupants (2.54) as the 1,800 square foot homes in the area encompassing Green Gables, Leland and Garland. Even between the largest home areas and the smallest, the difference is not significant. Comparing the average number of residents per household in the Seale Addition area of Palo Alto, where the homes averaged larger than 2,000 square feet, with the number of residents in the Ventura/Charleston Meadows area, where the average home size was 1,300 square feet, there was a differential of 2.55 to 2.39 people per household, a difference of less than 7 percent..This differential is not significant enough to warrant a reworking of the nexus study. The consultant who performed the initial nexus study also advised that attempts to demonstrate a correlation between house size and number of occupants have not proven fruitful for other cities. Staff recommends against, restructuring, the fees based on dwelling size for several reasons: 1) Council’s main objection seems to be to large homes replacing smaller homes, but replacement homes are not subject to these fees; 2)the impact fees, even at full cost-recovery levels, are an insignificant portion of the total development cost or sales price, of a home and most likely will serve neither as an incentive nor a deterrent in determining house size; 3) establishing multiple residential fee levels make the fees more difficult for the public to understand and for staff to calculate; and 4) complicating the rate structure invites requests for further residential fee categories, possibly making the fees even more difficult to understand and administer. Should Council choose to restructure the fees, however, staff offers the following analysis for sing!e-family and multi-family residences. Single-family residences: Council has the option of levying different levels of impact fees for different sized new homes based on City policies rather than the results of a nexus study, although impact fees cannot be charged to replacement homes regardless of their size because the data does not demonstrate that increased house size results in an increasein residents. The Comprehensive Plan documents Council’s .poli’cy L-12 to: preserve the character of residential neighborhoods by encouraging new or remodeled structures to be compatible with the neighborhood and adjacent structures. In the City’s individual review process for homes, staff works with applicants to ensure this neighborhood compatibility. CMR:329:02 Page 7 of 12 In light of this policy, Council could choose to define "large homes" and charge such new homes a fee level closer to the full replacement costs for impacts to parks, community centers and libraries. (The level selected by Council for single-family homes is currently at about 2/3 of the nexus amount regardless of house size.) Thus the fee for larger homes could be up to $15,798o The average single-family house in Palo Alto is approximately 1,900 square feet. A °’large" home could be defined as two times that size, or 3,800 square feet. Council could elect to charge a new (not replacement) home greater than 3,800 square feet the full cost-recovery level of $15,798 for impact fees for parks, community centers and libraries. Staff reviewed building permits issued for single family dwellings over the last year. Ninety permits were issued: 68 replacement homes and 22 new homes. If a higher fee were in effect for homes over 3,800 square feet, 60 percent of new homes would have been subject to the full nexus cost of $15,798 per home. Forty percent would be subject to the current fee level of $10,580 ,per home. However, it should be noted that replacement homes, averaging 3,890 square feet last year, would not be subject to impact fees. If a new fee is desired, the Finance Committee Should direct staff to prepare an ordinance establishing development impact fees for parks, community centers and libraries to establish a category of large .new homes and a resolution modifying the Municipal Fee. Schedule to increase the fee charged for this category of homes. Multi-family homes: Lower fee levels for smaller multi-family homes could be justified based on Council Policy H-2: Consider a variety of strategies to increase housing density and diversity in appropriate locations, and Program H-4: Evaluate the provisions for second dwelling units in single family areas to determine how additional units might be provided. Under the current ordinance, all multi-family and accessory dwellings pay impact fees totaling $6,930 per unit for parks, community centers and libraries (two- thirds of the full nexus amount). Should Council elect to decrease the fee for smaller multi-family dwellings, staff suggests a rate of $3,500 per unit (approximately one-thii:d of the nexus amount of $10,329). Staff recommends that a "small multi-family dwelling" be defined as one that is 900 square feet or less, which is the maximum size for accessory dwellings. Typically, this represents a one-bedroom apartment.. In general two-bedroom apartments are larger than 900 square feet. The Finance Committee could direct staff to prepare an ordinance establishing development impact fees for parks, community centers and libraries to establish a category of small multi-family units and a resolution modifying the Municipal Fee Schedule to decrease the fee charged for this category of homes. CMR:329:02 Page 8 of 12 Below-Market-Rate (BMR) Housing In the initial ordinance to adopt development impact fees for parks, community centers and libraries (Ordinance 4742), Council approved an exemption for residential housing projects that are 100% permanently-affordable. Such an exemption was consistent with the existing Housing Element of the Comprehensive Plan. At its meeting of March 25, 2002, Council expressed a desire to consider also exempting BMR units in other developments (that were not 100% affordable housing), as an encouragement to developers to consider additional BMR units without incurring impact fees. Staff recommends that the ordinance for development impact fees reflect the City’s policies as established in the Comprehensive Plan. At the June 26, 2002 Planning Commission meeting, the Commission agreed to recommend to the Council a new program, Program H-22 that states: Exempt permanently ~affordable housing units from any infrastructure impact fees that may be adopted by the City. The new text specifies: Units provided under the Below Market Rate (BMR) Program should be included in the impact fee exemption. The new wording for the Comprehensive Plan will be Considered by Council in September 2002. Staff recommends that the Finance Committee direct staff to prepare revisions to the ordinances exempting BMR units from the fees, and present the revised ordinances for Council adoption along with the Housing Element update to the Comprehensive Plan. Use of Traffic Fees At the March 25, 2002 Council meeting, the transportation impact fee in the Stanford Research Park/El Camino Real Se~wice Commercial zone was increased based on updated cost estimates for improvements. A revised list of intersection improvements funded ,by the fee was also approved. Members of the community and the Council expressed concern about limiting the use of fees to intersection improvements and a desire to use the impact fee funds for.other kinds of traffic management. .The transportation fee ordinance (PAMC 16.45.060) requires that impact fees collected be placed into a special fund, to be used for intersection improvements specified in the ordinance "or for alternative improvements, that are determined by the chief transportation official, subject to City Council approval, to provide adequate feasible alternative mitigation of the impacts addressed in the EIR..." (The EIR is defined in the ordinance as the Citywide Land Use and Transportation Study Draft Environmental Impact Report dated September 1988.) In other words, Council could authorize the use of impact fees for improvements other than for intersections, provided there is a finding that the alternative improvements meet the mitigation goals of the 1988 EIR. Such a finding will require a traffic engineering analysis of mitigation alternatives. One of two studies may provide the analysis required. First, during consideration of the project proposed at 2475 Hanover, City Council directed that an Environmental Impact Report addressing cumulative impacts of Stanford Research Park development be CMR:329:02 Page 9 of 12 prepared before any more projects in the Research Park area be considered. Staff recommends that a range of transportation mitigation measures and traffic calming be included in the scope of such an analysis. The. timing of this EIR is uncertain however, as it will b~.triggered by the next new development proposal in the Stanford Research Park.. Second, staff was directed to return ~vith a citywide transportation impact fee to address. alternative transportation solutions, such as traffic calming and supporting non-vehicular modes of transit. The nexus analysis for such an impact fee will follow completion of an upgrade to the City’s computerized transportation model, currently underway. Staff anticipates presenting results of the nexus study, along with impact fee recommendations, by the end of 2003. Once the analysis is complete for either the Stanford Research Park or citywide study, Council can take action regarding the imposition and use of impact fee funds. It should be noted that, per Assembly Bill 1600, impact fee funds may only be used for capital projects such as intersection improvements, bus shelters or bike lanes, not ongoing expenses. Impact fee funds can be used to purchase shuttle vehicles, for example, but not to operate them. RE SOURCE IMPACT The level of funding collected from development impact fees is based on the level of new development in the city. Therefore, the fiscal impact of these proposed changes is uncertain, but can be estimated based on past development activity. Retail exemption: The effect of the proposed exemption for retail spaces of under 1,500 square feet can be estimated by the projects submitted over the past two years (Table 1). The four projects proposing new retail square footage of under 1,500 square feet total approximately 2,500 square feet. At $18.75 per square foot, the development impact fees exemption would total $47,000. Size of residential units: Should Council elect to increase fees for larger new homes, each new (but not replacement) home would pay an additional $5,218 in impact fees for parks, libraries and community centers. Last year, 14 new homes were built in Palo over 3,800 square feet. Thus, the City could expect to receive an additional $73,000 from this policy change. A lower rate for small multi-family units would decrease the fees by about $3,500 per dwelling. A single 15-unit multi-family project with units under 900 square feet each would result in reduced fees of $42,000° CMR:329:02 Page 10 of 12 Below-Market-Rate Housing: An average of 3 BMR units were added to Palo Alto in each of the last 12 years. Exempting these units from fees would reduce annual impact fee revenues by approximately $21,000. In addition to the fiscal impacts of changes to the development impact fee ordinances, there are impacts on the staff administering the fees. Each exemption and new f~e level complicates the calculation of fees payable for a development project, makes the program more difficult for developers to understand, and increases the tracking and reporting required to manage the funds. POLICY IMPLICATIONS Development impact fees are levied based on a nexus study determining the impact that new development has on City facilities and levels of service. The results of the nexus study specify a~-full cost-recovery fee level, which is the maximum fee that a city could charge to new development. Council has made policy decisions to determine the level at which it chooses to charge various types of development in Palo Alto. Policy can also be the basis upon which exemptions are determined° Staff has proposed recommendations that are consistent with Council policies and priorities. ~ ALTERNATIVES TO RECOMMENDATION Council asked the Finance Committee to direct staff in areas in which changes to the development impact fee levels or policies would be desirable. The Finance Committee has the option of selecting any of the referenced areas for change or recommending that the existing ordinances remain unchanged. Staff did not recommend restructuring fee levels for larger single-family homes’or smaller multi-family homes. Should the Finance Committee determine that .such modifications to the fees are desirable, the Committee should: 1) direct staff to p~epare an ordinance establishing development impact fees for parks, community centers and libraries to establish a category of large new homes and a resolution modifying the Municipal Fee Schedule to increase the fee charged for this category of homes; and 2) direct staff to prepare an ordinance .establishing development impact fees for parks, community centers and libraries to establish a category of small multi,family units and a resolution modifying the Municipal Fee Schedule to decrease the fee charged for this category of homes. NEXT STEPS Commercial Housing In-Lieu Fee The housing fee ordinance was originally adopted over 17 years ago. Although it was revised in March 2002 to reflect the higher fee level, the text needs to be updated to CIVIR:329:02 Page 1 1 of 12 reflect the recent nexus study calculations and to meet currently accepted standards. Council. also directed staff to consider developing a specific housing mitigation fee rate for certain land uses that have been exempt under the ordinance. A nexus study will be necessary to determine a supportable fee rate for these unique land uses. Staff members needed to work on this project are currently committed to several high-priority housing assignments including the Opportunity Center, affordable housing site acquisition, and updating the housing element. Once progress is made on these projects, staff intends to refine the scope of work and seek cost estimates from the consultant. Staff anticipates returning to the Finance Committee in the fall with a work plan and budget estimates for action. Citywide Transportation Impact Fee As mentioned earlier in this report, a citywide transportation impact fee is under consideration to provide alternative transportation improvements and traffic calming measures. The nexus study and recommendations are anticipated by the end of 2003. ATTACHMENTS Attachment 1: Attachment 2: PREPARED BY: Current and Proposed Impact Fee Levels Population per Palo Alto household based on Census Tract data and average house size. LIBBY D A4VIE Sr. Financial Analyst, Administrative Services HEATHER Administrator, Planning and Community Environment DEPARTMENT HEAD APPROVAL: CARL YEATS~ Director, Administrative Services CITY MANAGER APPROVAL: Assistant City Manager CMR:329:02 Page 12 of 12 Attachment 1 Exhibit 1 Current and Proposed Impact Fee Levels Residential for Parks, Community Centers and Libraries Single Family home for Parks, Community Centers & Libraries Large home (greater than 2,700 Sq. Feet) for parks, community centers & libraries Multi-family unit (greater than 900 sq. ft.) Multi-family unit (smaller than 900 sq. ft.) 100% affordable housing development Below-Market Rate units Recovery Fee level per unit $15,798 $15,798 $10,329 $10,329 $10,329 Current Fee Level (as of January 29, 2002) $10,580 $10,580 $6,930 $6,930 No change Proposed Fee Level (specified if changed) No change No change No change No change $10,329 $6,930 0 Attachment 1 Exhibit 2. Current and Proposed Impact Fee Levels Nonresidential Recovery Fee level Current Fee Level per square foot (aS of March 25, 2002) PropOsed Fee Level (specified if changed) Commercial/Industrial Parks, community centers & ,libraries Housing Research Park Traffic $3.75 $57.81 $8.20 $3.75 $15.00 $8.20 No change No change No change Retail (greater than 1,500 square feet) Parks, Community $3.75 centers & libraries Housing $57.81 Research Park $8.20 Traffic $3.75 $15.00 $8.20 No change No change No change Retail (less .than 1,500 square feet) Parks, community $3.75 centers & libraries Housing $57.81 Research Park $8.20 Traffic $3.75 $15.00 $8.20 0 0 Hotel/Motel Parks, community centers & libraries Housing $1.70 $57.81 $1.70 $15.oo No change No change Attachment 2 Population per Polo Alto household based on Census Tract data and average house size Palo Alto Neighborhood (Census Tract #) Scale Addition (5114.98) Crescent Park/Community Center (5112) University Park/Downtown/ Professorville (5113.98) Green Gables/Leland/Garland , (5111) Barton Park/Green Acres (5106) Palo Verde/Los Arboles/ Charleston Terrace (51018.01) Old South Palo Alto/El Carmelo (5109) Stanford (5!16.03) Evergreen Park/College Terrace (5115.98) Monroe Park (5094.01) Midtown/W. Bayshore/De Anza (5110) Fair Meadow (5108.03) VenturaJCharleston Meadows (5107) Average Home Size (Square feet) 2147 2086 1862 1825 1765 1729 1650 ’1649 1636 1533 1529 1451 1306 Number of Occupants (owner- occupied) 2.55 2.62 2.13 2.54 2.38 2.56 2.52 2.59 2.14 2.25 2.57 2.54 2.39 Number of Occupants (renters) 2.13 2’19 1.54 2.81 2.16 2.76 2.12 2.06 1.87 1.72 2.36 1.95 2.16