Developments in Mitigation Fee Act

In-lieu fees that are used to mitigate development impacts are subject to the Mitigation Fee Act (Government Code § 66000 et seq.) (“MFA”).  Agencies that fail to make timely five-year findings for these fees are required to refund unspent fees.  This is the holding of a recent case, Hamilton and High, LLC v. City of Palo Alto, 89 Cal.App.5th 528 (2023). 

In this case, Palo Alto required developers of projects in its Commercial Downtown zoning district to pay an “in lieu parking fee” to defray the cost of new, off-site parking spaces for projects on sites that would otherwise be precluded from development due to parking constraints.  The in-lieu fees were to “be used to finance the construction of new parking facilities to meet the increased parking demand caused by new nonresidential developments.”  Developers could either provide sufficient parking spaces to meet the parking needs created by their projects or could choose to pay the in-lieu fee.

The Court found that the in-lieu fee was a “fee” for purposes of the Mitigation Fee Act, regardless of the fact that it was in-lieu of some other form of mitigation and regardless of the fact that the developer had chosen to pay the fee rather than perform the actual mitigation.

However, the Court affirmed the distinction between an in-lieu fee in an inclusionary housing ordinance (which is not subject to the MFA because it is in-lieu of a use restriction imposed for  a non-mitigation purpose) and an in-lieu fee like the parking fee (which is subject to the MFA because it is in-lieu of a requirement that mitigates adverse development impacts).

The MFA requires agencies to make certain findings every five years regarding unexpended fees.  If these findings are not made, the agency must refund the unexpended fees.  The court found that the statute of limitation for the developer’s action seeking a refund of fees began to run when the city refused the developer’s request for a refund of the fees, not when the city missed the five-year deadline.

The Court also provided some clarity regarding when the five-year findings must be made and which funds must be accounted for: “[W]e hold that section 66001(d)(1) requires that a local agency make five-year findings for the fifth fiscal year after the first deposit of a fee into an account or fund and at five-year intervals thereafter. Five-year findings must report all unexpended fees in the account or fund, irrespective of the date at which the fees were deposited, as long as the account or fund during the five-year period contained a positive balance of unexpended fees.”

Finally, the Court held that making late findings – which Palo Alto did – does not satisfy the MFA requirements.  The deadline is mandatory (not merely directory), and the agency does not get an opportunity to cure the missed deadline.  Consequently, the city was required to return the unexpended fees.

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