REPORT TO COUNCIL
SUBJECT
Title
Action to Amend Section 17.35.080 of the Santa Clara City Code to temporarily authorize a deferral for the payment of park-in lieu fees of residential developments from building permit to certificate of occupancy or final building inspection, subject to certain conditions and to bring the code into compliance with state law and approve a standard form Park In-Lieu Fee Deferral Agreement.
Report
BACKGROUND
On February 13, 2025, the City Council held a Special Meeting regarding the state of Santa Clara’s real estate and development market, which was presented by the San Francisco Bay Area Chapter of the Urban Land Institute. As shared at the Special Meeting, the current economic conditions shaping project feasibility for the new construction of multifamily housing present an extremely challenging environment nationally and locally. Rising labor costs and material costs from tariffs, as well as high interest rates for financing, are the biggest obstacles.
Development projects pay City impact fees to address the capacity or infrastructure needed to support the associated building and population growth. These development impact fees are paid by the project sponsors to the City prior to the issuance of a project’s Building Permit, which is the City’s regulatory permit that authorizes construction to commence.
In an effort to stabilize housing construction costs, effective as of January 1, 2025, the California legislature passed and Governor Newsom signed into law SB 937. SB 937 amends the Mitigation Fee Act to shift the timing of payment of certain impact fees for “designated residential development projects” to a Certificate of Occupancy. The Certificate of Occupancy is the permit that cities issue to acknowledge that a project’s construction is complete and authorizes occupancy of individual units. The period between Building Permit issuance and Certificate of Occupancy essentially reflects a project’s construction period.
Senate Bill 937 seeks to minimize the impact of market fluctuations and high interest rates on housing production by delaying the requirement to pay local government development fees. In addition, by delaying impact fee payment until after construction is complete, the subject fees can be excluded from construction loans, which have higher interest rates than subsequent permanent financing.
DISCUSSION
To date in 2025, 2,361 new residential units have opened in the City, which represents an especially strong year for delivery of units. The timing of housing production however relates to a period of several years including pre-development work, receipt of entitlements (planning approval), building plan review, obtainment of financing, and construction. There has been a slowdown within the housing production pipeline process, with few units receiving building permit issuance to begin construction. Projects totaling only 114 units received building permits in 2024 and 511 units to date in 2025.
As mentioned earlier, the passage of SB 937, reflects a new requirement local governments must implement to delay when certain impact fees are collected for “designated residential development.” SB 937 defines “designated residential development” as any residential development that meets any one of the following criteria: (1) dedicates 100% of units to lower income households; (2) meets the requirements to qualify as a Low Barrier Navigation Center as described in Government Code section 65662; (3) is approved through streamlined ministerial review as authorized by Assembly Bill 2011; (4) is approved through streamlined ministerial approval and meets the requirements of Government Code section 65913.4(a); (5) is approved through the provisions of SB 4 that allow for affordable housing on the lands of faith-based uses or certain public universities; (6) is entitled to a density bonus pursuant to state density bonus law, or (7) that include 10 or fewer units.
Many projects in Santa Clara will qualify for fee deferral through SB 937. In particular, the qualification for SB 937 for projects entitled to density bonus under state density bonus law will have the most applicability in Santa Clara. A project qualifies for density bonus if it meets specified affordability requirements, including projects that have 10% of units affordable to households earning at or below 80% Area Median Income (AMI). The City of Santa Clara has an affordable housing ordinance that specifies that housing projects must have a minimum of 15% of units affordable to households earning 100% AMI. To comply with the City’s affordable housing ordinance, many projects spread their required units across affordability brackets, placing some of the 15% of units below 100% AMI and some units above 100% AMI to provide an average of 100% AMI for the required units. This affordability spread is often strategically done to have projects meet the City’s Affordable Housing Ordinance and be eligible for state density bonus law.
There are still housing projects that do not qualify for SB 937, especially projects that received planning approval before the most recent version of state density bonus law took effect on January 1, 2023. There is also a nuance to state density bonus law that does not consider housing projects that provide affordable housing units in off-site arrangements; and the SB 937 fee deferral does not apply to those projects.
Due to the triennial update of the State 2025 Building Standards Code, which takes effect January 1, 2026, projects that have been reviewed under earlier codes are now required to be issued their building permits under the previous code they were reviewed under or they will need to resubmit new plans and pay fees to be reviewed under the new 2025 Code.
The topic of potentially expanding impact fee deferral is time-sensitive as impact fees are paid at building permit issuance unless the projects are qualified for fee deferral under SB 937. Allowing expanded opportunities for impact fee deferral will support the feasibility of projects seeking to obtain financing under today’s challenging market conditions.
Proposed Ordinance Amendment to Section 17.35.080 of the Santa Clara City Code
Proposed is an ordinance change to bring the City’s Code into compliance with state law by clarifying that, when required by law, payment of the parks impact fee will be deferred. It also goes above and beyond state law by allowing projects that do not qualify for a fee deferral under state law that receive a building permit prior to December 31, 2027 to receive approval for a deferral, provided the City Manager finds that the deferral will not negatively affect the City’s park expansion efforts.
The proposed ordinance also provides that any approved deferral of Park In-Lieu Fees shall require execution of a Fee Deferral Agreement between the property owner or lessee, and the City. The Fee Deferral Agreement will specify the deferred payment schedule; establish remedies and security to ensure full payment prior to Certificate of Occupancy; and affirm that no rights to final occupancy, completion, or use of the development are vested until all deferred fees have been paid in full. The City Manager will be authorized to execute the form Fee Deferral Agreement, subject to the City Attorney’s approval. A copy of the proposed Fee Deferral Agreement is included as Attachment 2.
The Parkland in-Lieu fee, often referred to as the “Parks In-Lieu Fee,” is established and adopted by the City Council annually based the number of persons per household published in the United States Census, current estimated land value, and park improvement value.
The Parks In-Lieu Fee is often the largest fee collected by the City for residential development projects. By temporarily allowing for deferral of the payment of the parks in-lieu fee beyond state law requirements, the City hopes it will assist in the facilitation of housing construction by lowering financing costs for builders through the reduction of upfront costs. Additional time is needed to determine if other impact fees should be considered for deferral, beyond the requirements of SB 937.
The proposed ordinance would allow housing development projects throughout the City to be provided a parks in-lieu fee deferral if specific terms are met. Also proposed in the ordinance is to grant the City Manager discretion to deny a request for deferral of parks in-lieu fee should it negatively affect the City’s park expansion efforts.
The City Manager’s authority to defer payment of the Park In-Lieu Fees for projects that are not entitled to the deferral by state law will not apply to projects that receive a building permit after December 31, 2027. The purpose of this limitation is to facilitate housing in the existing pipeline process through these current economic conditions.
ENVIRONMENTAL REVIEW
The action being considered does not constitute a “project” within the meaning of the California Environmental Quality Act (“CEQA”) pursuant to California Code of Regulations Title 14 Section 15378(b)(4) in that it is an administrative activity that does not involve commitment to a specific project which may result in potential significant impact on the environment.
FISCAL IMPACT
The Parks In-lieu Fee is typically collected prior to the issuance of the building permit. However, the payment of Park In-Lieu Fees for specific designated residential projects are now deferred until the issuance of Certificate of Occupancy under SB 937. The proposed action would expand the Parks In-Lieu Fee deferral to residential development projects throughout the City that receive building permits prior to December 31, 2027, and subject to the City Manager determining that the deferral will not negatively affect the City’s park expansion efforts. With this change, Parks In-Lieu Fees will be collected prior to issuance of Certificate of Occupancy, which is one to three years after the current practice of collecting fees prior to the issuance of the building permit. The deferral of fees may delay the use of the funding and result in less buying power for those fees.
It is difficult to project the number residential building permits issued in any particular year and the number of projects for which the developer will opt to pay the in-lieu fee rather than provide the park improvements. Thus, the amount of Parks In-Lieu Fee revenues that would be deferred from this proposed action compared to current practice of collecting in-lieu fees at Building Permit, and the impact, would also be difficult to anticipate.
The City deposits Parks In-Lieu Fees received into separate accounts specified for either Quimby or Mitigation Fee Act. During the development of the City’s Capital Improvement Program budget, in-lieu fees are allocated to Capital Improvement Program projects with allowable uses of the funds that may include acquisition of parkland and development of neighborhood and community parks, and, under certain conditions for Quimby, the rehabilitation of existing park facilities. In-lieu fees cannot be used for ongoing maintenance.
COORDINATION
This report was coordinated with the City Manager’s Office, City Attorney’s Office, Community Development Department, and Parks and Recreation Department.
PUBLIC CONTACT
Public contact was made by posting the Council agenda on the City’s official-notice bulletin board outside City Hall Council Chambers. A complete agenda packet is available on the City’s website and in the City Clerk’s Office at least 72 hours prior to a Regular Meeting and 24 hours prior to a Special Meeting. A hard copy of any agenda report may be requested by contacting the City Clerk’s Office at (408) 615-2220, email clerk@santaclaraca.gov or at the public information desk at any City of Santa Clara public library.
RECOMMENDATION
Recommendation
1. Waive first reading and introduce an ordinance amending Chapter 17.35 (Park and Recreational Land) Section 17.35.080 (Procedure) of the Santa Clara City Code to temporarily authorize a deferral of the payment of park-in lieu fees of residential developments to certificate of occupancy or final building inspection, subject to certain conditions and to bring the code into compliance with state law.
2. Approve a standard form Park In-Lieu Fee Deferral Agreement and Notice of Lien with Power of Sale, on the terms and in substantially the form presented, authorize City Manager to modify the agreement as needed for individual projects, and execute the finalized agreement subject to approval as to form by the City Attorney.
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Staff
Reviewed by: Reena Brilliot, Director of Economic Development and Sustainability
Approved by: Jovan Grogan, City Manager
ATTACHMENTS
1. Ordinance to Amend Section 17.35.080 of Santa Clara City Code
2. Park In-Lieu Fee Deferral Agreement and notice of Lien with Power of Sale