Commercial Linkage Fees (CLF) are a standard tool used by local communities for generating affordable housing resources. The CLF is similar to other impact fees levied on new development, and helps cover the cost associated with creating new or expanded public facilities to meet the additional demand created by the development, such as parks, schools, libraries and streets. Before levying an impact fee, jurisdictions are required by state law to complete a nexus study that shows the linkage between the new development and the increased demand for the facilities. The results of the nexus study establish the maximum legal fee that may be charged.

In the case of the CLF, as cities build jobs-generating commercial real estate – like new office buildings, retail space, or warehouses – commercial developers pay a fee to offset a small portion of the need for affordable housing created by new jobs. CLF nexus studies generally show that development causes a significant increased demand for affordable housing, since many workers live in households with incomes below what is necessary to afford the local cost of housing.

Following the nexus study, local city councils set fees at levels expected to generate resources for local affordable housing development without making commercial development infeasible. In some jurisdictions, and sometimes for different areas within the jurisdiction, a separate “Fee Feasibility Analysis” is conducted to assess the impact of different fee levels across development types. The fee is levied per square foot, and collected when projects start construction.

Commercial Linkage Fee in San Jose

On Tuesday, September 1st, 2020, the San Jose City Council approved a Commercial Linkage Fee (CLF) Ordinance, joining all of the other major cities in the South Bay that have already adopted fees. CLFs require commercial developers to pay a fee to address the affordable housing needs created by future employees.

While this was most definitely a win for the hundreds of people in the city who have advocated for this measure over the last few years, the adopted fees are the lowest in the county and exclude some types of development. The council acknowledged that the adopted fees were place-holders until another feasibility analysis could be completed in two years. The ordinance is by far the most complicated in the Bay Area.  The fee levels are reported in the table below.

City of San Jose Commercial Linkage Fee Ordinance - September 1, 2020

Nexus CategoryFee CategoryDowntownRest of City
OfficeDevelopment less than 100,000 sf$3 per square ft over 40k sf/ No Fee below 40k sf*$3 per square ft over 40k sf/ No Fee below 40k sf*
OfficeDevelopment greater than 100,000 sf$12 OR $5 and up to $10 as building is leased**$5 OR $2 and up to $3 as building is leased**
RetailDevelopment less than 100,000 sfNo Fee ($0)No Fee ($0)
HotelCitywide Hotel Uses$5 $5
IndustrialDevelopment less than 100,000 sfNo Fee ($0)No Fee ($0)
IndustrialDevelopment greater than 100,000 sf$3 OR $1 and up to $2 as building is occupied**$3 OR $1 and up to $2 as building is occupied**
WarehouseWarehouse/ Distribution$5 $5
Residential CareResidential CareNo more than $6No more than $6
*$3 sf of which the first 40,000 pays no fee – 100,000 sq ft = $1.8 sf, 50,000 sq ft = $0.6 sf.
**Initial payment at COO, following payments at Tenant Occupancy COO as space is leased.

The ordinance will be applied retroactively to all projects approved after September, 2019. The fee level will be set at the rate that is in place when developers receive their building permits, but fees will not be due until construction completion, unless the developer chooses to delay payment as described in the table above. In most cases developers will also have the option of building or purchasing affordable housing instead of paying the fee.

To add to complexity of the discussion, the council directed staff to explore a number of additional policy options and to come back with a new feasibility analysis in two years that considers different fees for projects over one million square feet and a geographic analysis of submarkets similar to that included in the study released in July.

SV@Home is committed to tracking the progress of the ordinance’s implementation, and advocating for significantly higher fees in 2022 if they are reflective of the feasibility analysis.

Commercial Linkage Fees in Other Santa Clara County Jurisdictions

  CLF Affordable Housing Fee Levels in Santa Clara County (Per Sq Ft)

Non-residential fees    by City Office / R&D Retail Hotel Industrial
Palo Alto $36.53 $21.26 $21.26 $21.26
Mountain View* $28.25 $3.02 $3.02 $28.25
City of Santa Clara $20.00 $5.00 $5.00 $10.00
Cupertino $24.60 $12.30 $12.30 $24.60
Sunnyvale** $17.20 $8.60 $8.60 $17.20
Milpitas $8.00 $8.00 $8.00 $4.00
Average Fees $22.43 $9.70 $9.70 $17.55

*Mountain View: Office/R&D < 10K sq ft pays ½ fee, Hotel/Retail < 25k sq ft pays ½ fee.
**Sunnyvale fee for Office/Industrial is ½ fee level up to 20k sq ft, and full fee for sq ft above 20k

 

SV@Home’s Position: We Need New Local Sources of Revenue for Housing, Especially As We Add New Jobs

SV@Home is working to raise additional funds for housing for working families by achieving full participation from all cities and the County to adopt Commercial Linkage Fees.

Key components of a successful commercial linkage fee ordinance include:

  • All job-producing uses should pay a fee, although fee levels should be feasible for each development type
  • It is often important to consider the size of developments in establishing fee structures, as the fees may have a greater impact on smaller developments
  • The fee must be balanced so it will generate funding sufficient to develop new affordable homes for new employees, but not be set so high that it makes commercial development infeasible.

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