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Home My WebLink AboutStaff Report 2604-6208CITY OF PALO ALTO Policy & Services Committee Special Meeting Tuesday, April 14, 2026 6:00 PM Agenda Item 3.Update on Citywide Development Impact Fee Nexus and Housing Feasibility Study. CEQA Status: Exempt under CEQA Guidelines Section 15378. Late Packet Report Added, Staff Presentation Policy & Services Committee Staff Report Report Type: ACTION ITEMS Lead Department: Planning and Development Services Meeting Date: April 14, 2026 Report #:2604-6208 TITLE Update on Citywide Development Impact Fee Nexus and Housing Feasibility Study. CEQA Status: Exempt under CEQA Guidelines Section 15378. This report will be a late packet report published on March 9, 2026. 1 9 5 1 0 Policy & Services Committee Staff Report From: City Manager Report Type: ACTION ITEMS Lead Department: Planning and Development Services Meeting Date: April 14, 2026 Report #: 2603-6061 TITLE Update on Citywide Development Impact Fee Nexus and Housing Feasibility Study. CEQA Status: Exempt under CEQA Guidelines Section 15378. RECOMMENDATION Staff recommend the Committee receive an update on the subject effort and provide feedback on potential 2050 residential and non-residential growth projections. EXECUTIVE SUMMARY Staff are conducting a comprehensive update of Palo Alto's development impact fees and related in-lieu fees. In December 2025, City Council approved a professional services contract with Keyser Marston Associates (KMA), with NBS Government Finance Group (NBS) as a subconsultant, to prepare an AB 602-compliant nexus study and financial feasibility analysis. This report provides a preliminary analysis of 2050 growth projections, which will serve as an input for certain fee calculations related to transportation and fire safety, and provide a basis for projecting fee revenues over time. BACKGROUND Development impact fees help ensure new development pays its fair share of the public facilities needed to serve growth. Under California's Mitigation Fee Act (AB 1600), jurisdictions may charge these fees when there is a reasonable relationship, or nexus, between the fee and the type of development. Assembly Bill 602, effective January 1, 2022, added requirements to adopt and update certain impact fees at least every eight years. Palo Alto's Housing Element also requires timely updates to certain housing-related fees and feasibility analyses. To meet these state law and Housing Element requirements, and to create a consistent citywide fee framework, the City Council approved a professional services contract in December 2025 to comprehensively update multiple impact and in-lieu fees. The work includes 2 9 5 1 0 development forecasting, facility needs analysis, fee and revenue analysis, financial feasibility testing, and implementation recommendations for administration, accounting, and reporting. ANALYSIS 3 9 5 1 0 number of existing residential units is based on the January 1, 2025 DOF report, increased by 0.3 percent to account for 2025 growth. The estimate of existing jobs in the City was based on data from the 2022 Economic Census, adjusted to 2026. Non-residential development amounts were estimated from the jobs data using employment density factors, with no assumed growth in non-residential categories from 2022 to 2026 except in the office category, where 0.1 percent annual growth was applied. 4 9 5 1 0 the likelihood that buildout will approach Plan Bay Area 2050's projections within the study horizon. Table 1: City of Palo Alto Residential Growth Projections Through 2050 Approximate Existing Conditions (January 2026) Low Range Plan Bay Area 2050 Staff Recommended 5 9 5 1 0 planning horizon; 2,700 units associated with SB 79 development potential around existing transit stations; and 2,400 units from the San Antonio Road corridor. This estimate is considered conservative, reflecting real market constraints including elevated construction costs, labor costs, and tight lending conditions that continue to compress development margins and make it difficult for many builders to achieve the returns necessary to move projects forward. That said, several factors could drive higher production over the horizon. Development may occur outside of transit stations or housing focus areas; lower borrowing costs or higher rents may stimulate greater activity; and local or state housing policies may serve as additional catalysts. Conversely, if fewer units are produced, the city would collect less fee revenue, while greater production would generate more revenue, though that revenue would also correspond to increased demand for city services. Total development impact fee revenue is demand-driven and fluctuates accordingly. Fees are required to be updated every eight years, ensuring they remain calibrated to anticipated development levels and the infrastructure planning needed to accommodate that growth. Hotel/motel: the initially projected decline was revised upward because it was skewed by a small number of recent projects that replaced hotels with housing; the revised estimate reflects pipeline projects and development trends from 2018 to 2024. Commercial: although some commercial space is being converted to residential use, the initial projected decline was removed to reflect City efforts to strengthen retail along El Camino Real and encourage ground-floor retail; commercial space is therefore projected to remain at approximately 6.5 million square feet through 2050. 6 9 5 1 0 Industrial: the initial estimate was reduced by 5 percent to reflect expected residential development along San Antonio Road and Fabian Way, where some existing industrial uses may transition. Public facilities: the initial growth rate is retained to account for likely new public facilities associated with the Cubberley Community Center project. Job growth was then estimated using NBS employment density assumptions applied to the projected increase in non-residential square footage by 2050. Table 2: City of Palo Alto Existing Non-Residential Conditions and 2050 Growth Projections Existing Conditions (estimated as of January 2026) Staff Recommendation Total Jobs 125,000 130,000 Total Hotel/Motel Rooms 2,500 2,750 Total Non-Residential Development 53,100,000 53,700,000 Total Square Feet of Commercial Development 6,500,000 6,500,000 Total Square Feet of Office Development 27,500,000 28,500,000 Total Square Feet of Medical Development 8,000,000 8,000,000 Total Square Feet of Industrial Development 10,500,000 10,000,000 Total Square Feet of Public Facilities Development 600,000 700,000 Overall, the non-residential forecast reflects a relatively stable development picture, with net growth of approximately 600,000 square feet and 5,000 jobs citywide by 2050. The modest scale of this projection is intentional: it reflects the continued constraints on large-scale office and commercial development in a largely built-out city, tempered by the policy adjustments described above. Staff is comfortable that this estimate provides a reasonable basis for fee calculations and revenue projections, and it will be revisited as part of the required eight-year update cycle. 7 9 5 1 0 Next Steps and Anticipated Schedule FISCAL/RESOURCE IMPACT STAKEHOLDER ENGAGEMENT ENVIRONMENTAL REVIEW ATTACHMENTS APPROVED BY: APRIL 14, 2026 DEVELOPMENT IMPACT & IN-LIEU FEE STUDY Policy & Services Committee Update Julia Knight, Senior Program Manager PaloAlto.gov PRESENTATION OVERVIEW Recommendation Staff recommend the Committee receive an update on the subject effort and provide feedback on potential 2050 residential and non-residential growth projections. Key Content •Policy Context •Project Scope and Timeline •Fee Calculation Methodologies •Preliminary Growth Projections 2 POLICY CONTEXT California's Mitigation Fee Act (established through AB 1600) •Allows jurisdictions to charge impact fees to new development •Requires a nexus study to justify impact fee amounts AB 602 •Effective January 1, 2022 •Requires all impact fee nexus studies to be updated every 8 years •Requires some fees to be charged on a per square foot basis* Housing Element Program Requirements •Evaluate and adopt updated parks, library, and community facilities fees by September 2026 •Evaluate and update housing impact and in-lieu fees by January 2027 *Palo Alto made select fee calculations changes to comply in 2024 3 TEAM & SCOPE 4 Note: Utility-related and area-specific impact fees are not included in this study. The team includes: •NBS (nexus study lead) •KMA (financial feasibility study lead) Nexus and feasibility studies will be completed for the following fees: Development Impact Fees In-Lieu Fees •Park •Community Center •Library •General Government Facility •Citywide Transportation •Public Safety Facility •Housing •Parkland Dedication •Public Art •Housing May/June July/August September/ October November/ December January/ February May/June July/AugustMarch/April PROJECT TIMELINE September/ October 5 2025 2026 * Except for Citywide Transportation Fee; see slide 7 for details TYPICAL IMPACT FEE CALCULATION METHODOLOGY 1.NBS to calculate existing level of service provided for most facilities 2.NBS and staff to identify and consider any existing deficiencies (or excess capacity in facilities) or infrastructure 3.NBS and staff to identify any additional facilities and/or infrastructure investments needed to continue to provide the existing level of service through 2050 4.NBS to allocate facility costs in proportion to the impact of new development by land use type to find maximum legally allowable fee 5.KMA to conduct financial feasibility study to determine the maximum fee the market can support; consider implications for housing production 6.City to set fee at or below the maximum allowed fee based on financially feasibility study Note: In-Lieu fees will generally follow the same approach; citywide transportation impact fee and public safety impact fee may be calculated using the methodology outlined on the next slide. 6 OTHER METHODOLOGIES 7 NBS may recommend using other methodologies for certain fees. For example, NBS recommends using the planned facilities method to calculate the citywide transportation impact fee. 1.Staff to identify the list capital improvement projects needed to serve projected new development (based on preliminary growth projections) 2.Staff to calculate the cost of transportation facilities needed to serve new development and NBS to apply a standard vehicle trips cost allocation method, relying on ITE data factors for trips and average trip length (if applicable), to set the maximum legally allowable fee 3.KMA to provide the City with a summary of financial feasibility considerations 4.City to set fee at or below the maximum legally allowable fee based on these considerations Transportation Impact Fee Timeline The City has until 2030 to update this fee under AB 602, but staff is targeting a mid- 2027 update to support a streamlined and coordinated fee update effort citywide. RESIDENTIAL GROWTH PROJECTIONS 8 Projections will inform transportation impact fee calculations and serve as the basis for fee revenue projections and facilities planning. Notes: The estimated 6,200 new housing units includes 2,100 units from pipeline project conversions; 1,600 ADUs citywide over the planning horizon; 2,700 units associated with SB 79 development potential around existing transit stations; and 2,400 units from the San Antonio Road corridor. Total population may vary based on household size and/or residential vacancy rate changes. NON-RESIDENTIAL GROWTH PROJECTIONS 9 Projections will inform transportation impact fee calculations and serve as the basis for fee revenue projections and facilities planning. JULIA KNIGHT Senior Program Manager julia.knight@paloalto.gov 650-838-2839