The purpose of this report is to respond to the need for clarity in establishing park in-lieu fees for residential development. Council ranked this issue 7 of 7 issues to be addressed by Community Development staff in 1999. (See Attachment A).

The concern was raised by staff who administer the fee collection process. The specific area of concern relates to the need to establish a fair market value for the land to be developed. This value is used to determine the fee to be charged in lieu of land dedication, if land dedication is not desirable or feasible. Arriving at a fair market value which is agreeable to both the City and the developer has sometimes become contentious and time consuming for both the project proponent and for staff. The issue paper suggests that alternative methods for determining park in lieu fees be investigated and considered for implementation. The park in-lieu ordinance would be amended, if needed to accomplish this purpose.

At its hearing of September 28, 1999, the Planning Commission recommended approval of Alternative No. 1 in a 5-1 vote (five in favor, one opposed and one absent). No testimony was offered at the hearing.

Based on the discussion below, staff recommends that the City Council approve Alternative No. 1 and direct the Director of Community Development to prepare an average fair market value for residentially zoned property as part of the annual Fee Resolution.

In 1981, the City of Sunnyvale established park dedication requirements for residential subdivision and in-lieu fees to enable the City to establish and pay for parks and recreational services needed by new residents. The fees were applied to property being developed for residential ownership only. This would include single family homes, condominiums and townhouses.

Because residential ownership development involves the creation of subdivisions, the ordinance was codified under Title 18 (Subdivisions) of the City’s Municipal Code. It is found in Chapter 10. The ordinance requires that either a portion of the proposed land to be developed be dedicated for park use or a commensurate fee be paid. The formula for determining the amount of land to be dedicated or fee to be paid is described below.

Since new apartments also create new residential units whose residents need to be served by parks and recreational facilities, in 1991, Chapter 86 was added to Title 19 of the Municipal Code, to include apartment developments under the park in-lieu fee requirement (Attachment B). This change not only helps to provide for additional park facilities but also serves to encourage ownership development while not providing an incentive for apartment development.

As part of the 1991 changes, an exemption for the requirement of park in-lieu fees was established for dwelling units designated as affordable housing units for very low, low or moderate income households. Such units are subtracted from the total number of dwelling units applied to the fee formula.

The following General Plan policies and goals apply to the subject discussion.

There are two methods of providing for park facilities for new residents.

• A portion of the land development can be dedicated for park facilities.
• A fee can be paid to the City to be used for acquisition and development of park and recreational facilities.

DEDICATING LAND FOR PARKS

A project may be required to set aside a portion of land for park dedication under certain conditions. If a portion of the land proposed for residential development has been designated in the Open Space and Recreation Subelement of the General Plan for a park or recreational facility, the property owner "shall be required to dedicate land for park and recreational facilities sufficient in size to serve the residents of the project" (Chapter 18.10 and Chapter 19.86 of the Municipal Code). The land to be dedicated must be suitable with regard to the slope, topography and geology of the site, the surrounding development, and the intended park or recreational use. The amount of land set aside for this purpose is determined by the formula described in the "Density formula" section of this report.

FEE IN-LIEU OF LAND DEDICATION

Under most circumstances, an in-lieu fee serves as an appropriate alternative to the dedication of land. The fee amount is intended to capture the City’s purchase and improvements costs for an area comparable to the dedication requirement. A fee in-lieu of land dedication will be required when:

1. No park or recreational facility has been designated to be located on all or a portion of the site by the Open Space and Recreation Subelements of the General Plan;
2. Dedication is impossible, impractical or undesirable, as determined by the City;
3. The proposed residential development contains 20 or fewer units.

In certain residential housing projects which contain more than 20 dwelling units, a combination of land dedication and fee payment may be required.

DENSITY FORMULA

A formula based on residential density, as designated by the General Plan and implemented by the Zoning Code, has been established in Section 19.86.040 of the Municipal Code (Attachment B). Based on the dwelling category (acreage required per dwelling unit) and the number of dwelling units proposed by the project, the formula determines the acreage required for park dedication.

CALCULATING THE IN-LIEU FEE

If a fee will be paid in-lieu of land dedication, a fair market value per acre of land is established by the Director of Community Development. This fair market value is applied to the amount of land required by the above formula. For example, if .003125 acres of park land per dwelling unit are required for a low-medium density residential development and there are 25 such dwelling units proposed, the developer would be required to pay the fair market value of .078 acres of land (or 3,403 square feet).

It is the matter of determining the fair market value that is the subject of this report.

DETERMINING FAIR MARKET VALUE

Fair market value has generally been defined as that price which a willing buyer agrees to pay and a willing seller agrees to accept.

If the property which is proposed for residential development has recently been purchased, that recent selling price can be used as the basis of determining the fair market value. If both the City and the developer agree to accept the recent price as the fair market value of the property, the matter is resolved.

However, in some cases, the land proposed for development has not been recently sold. A recent zoning change (as from industrial to residential) can also affect the fair market value of the land. Other variables, such as location, come into consideration.

Because of these variables, it has been the practice of the City to determine the fair market value of each individual proposed development on a case by case basis based on the "comparable" principle used by real estate appraisers to establish property value. This practice uses recent selling prices of comparable property. The question to be answered is:

Since the density formula is easy to understand, is objective, and is based on principles established by the General Plan, it has not presented either staff or developers with difficulties in using it to establish park dedication. Any disagreement between the City and the developer has been the determination of fair market value of the subject property. The purpose of this study, as noted above, is to find an alternative method to using "comparables" (on a case by case basis) to determine fair market value. It is hoped that a simple, objective method can be devised that will both provide better customer service to developers and increase staff efficiency.

ALTERNATIVE METHODS

As an alternative to calculating the fair market value of land on a case by case basis, the Director of Community Development could develop an annual land value that would be applied to all projects over the coming year. As part of the annual fee resolution, the Community Development Department would work closely with the Public Works Department (and other Departments as necessary) in reviewing comparables, and other real estate trends, to establish a fair and objective market value. This "annual" fair market value would be an average taking into consideration zoning, site size and so forth that can impact property value by location. Staff believes that the small value variations from site to site around the City would have only a slight effect from project to project and would not have a measurable effect on the overall amount of fees collected by the City.

Another alternative that could be considered in establishing an annual land value is a slight modification of the alternative discussed above. For this alternative, the annual fair market value would be based on average sales costs (undeveloped or developed) of residential land over the last few years, along with a formula which provides for an annual appreciation (or depreciation) rate. The land value per square foot for residential property would be determined annually by the Community Development Director through application of the formula. This alternative would be quite accurate initially but the formula would need to be updated from time to time as market trends evolve.

A third alternative to set a fair market value for residential property would base the determination of the annual value on the location of the project site relative to established neighborhood planning areas. There are nine neighborhood planning areas within the City including: Lakewood, West Murphy, East Murphy, Washington, Ponderosa, De Anza, Serra, Ortega, and Raynor. This alternative would require the development of nine separate fair market value estimates; one for each neighborhood. Any neighborhood planning area may contain one, or several zoning districts, however, a determination of fair market value by neighborhood planning area would address property value differences as a consequence of geographic location.

The City of Cupertino collects in-lieu park fees in a manner similar to the City of Sunnyvale. The City’s Public Works Department prepares an appraisal of all vacant residentially zoned land on an annual basis. The average value per acre is then calculated and used as the fair market value to determine applicable in-lieu fees.

PLANNING COMMISSION REVIEW

The Planning Commission held a public hearing on this item on September 27, 1999. No public testimony was offered during the hearing. The Planning Commission recommended approval of Alternative No. 1 in a 5-1 vote. The dissenting Commissioner noted her preference for Alternative No. 3. One Commissioner was absent.

The total amount of park in-lieu fees collected by the City may vary slightly depending on the methodology selected to determine fair market value. An exact determination of the extent total fees may vary cannot be calculated, however, staff believes that the difference, if any, would be statistically insignificant.

Notice of the public hearing for this project was published in the Sun Newspaper. The staff report for this project was posted on the City of Sunnyvale’s Website and a copy of the report was provided at the Reference Section of the City of Sunnyvale’s Public Library. The Agenda was posted on the City of Sunnyvale’s Website and recorded for SunDial.

City staff contacted a cross-section of residential developers to discuss proposed changes to the determination of fair market value and the calculation of park in-lieu fees. All of the developers supported the general idea of an established fair market value in that it allows the calculation of the in-lieu fee to be made very early in the plan review process. With an established value in place, the exact park in-lieu fee can be clearly identified in a project’s conditions of approval. The developers also noted that care must be taken in calculating the annual fair market value because land values can change considerably from year to year.

This item was considered by the Planning Commission at a regularly scheduled public hearing on September 27, 1999. The minutes from the meeting are attached (Attachment C). The Commission discussed the item and recommended that the City Council adopt Alternative No. 1 allowing for the preparation of a fair market value for residentially zoned property as part of the annual Fee Resolution. The vote was 5-1 with the dissenting Commissioner referring Alternative No. 3.

1. The Director of Community Development to prepare an average fair market value for residentially zoned property as part of the annual Fee Resolution.
2. Prepare a resolution for the determination of an average fair market value of residentially zoned property to serve for the remainder of fiscal year 1999/2000.
3. Prepare an ordinance amending Titles 18 and 19 of the Sunnyvale Municipal Code on the preparation of an annual fair market value for residentially zoned property.

2. Approve Alternative 2 directing:

1. The Director of Community Development to prepare a multi-year, formula based determination of fair market value for residentially zoned property.
2. Prepare a resolution for the determination of a multi-year, formula based fair market value of residentially zoned property to serve for the remainder of fiscal year 1999/2000.
3. Prepare an ordinance amending Titles 18 and 19 of the Sunnyvale Municipal Code on the preparation of a multi-year, formula based fair market value for residentially zoned property.

3. Approve Alternative 3 directing:

1. The Director of Community Development to prepare a fair market value estimate for residentially zoned property by neighborhood planning area as part of the annual Fee Resolution.
2. Prepare a resolution for the determination of an average fair market value of residentially zoned property by neighborhood planning area to serve for the remainder of fiscal year 1999/2000.
3. Prepare an ordinance amending Titles 18 and 19 of the Sunnyvale Municipal Code on the preparation of an annual fair market value by neighborhood planning area for residentially zoned property.

4. Do not approve changes to the current process for determining fair market value.

Alternative 1

Prepared by:

Fred Bell
Principal Planner

Reviewed by:

Trudi Ryan
Planning Officer

Reviewed by:

David S. Boesch
Director, Community Development

Approved by:

Robert S. LaSala
City Manager