Housing and business developers in San Jose avoid building public improvements by paying fees to the city, but this often leads to infrastructure projects slowing to a crawl.
Developers are typically responsible for building necessary infrastructure as part of residential and commercial projects, such as underground utilities, street improvements, traffic signals and more. To get around the responsibility of these additional requirements as market conditions raise the cost of construction in Silicon Valley unprecedented rates, many developers agree to pay “in-lieu” fees. This pushes the infrastructure improvements onto the city, causing delays and increased costs leading to a backlog, as work can’t begin until sufficient funds are available.
The San Jose Public Works Department collected about $2.4 million in public improvement in-lieu fees for the 2023-24 fiscal year, bringing total program funds to almost $6 million, Director Matt Loesch said.
A 2023-24 report on the public improvement in-lieu fees shows dozens of completed projects that lack millions of dollars to finish the needed infrastructure work. City leaders anticipate enough in-lieu fee funding to be collected by 2040, but the backlog continues to grow.
“Developers may pay the in-lieu fee or may choose to construct the public improvements themselves to meet their unique timeline and project goals,” Loesch told San José Spotlight. “As development progresses and the fees accumulate, the city’s Public Works Capital Improvement Program, or CIP, can then construct the public infrastructure improvement for greatest efficiency of resources while maintaining the high-quality standards of public infrastructure.”
City officials assess housing or business projects and then provide developers with potential costs and fees, land use consultant and San Jose State University urban planning professor Kelly Snider said. Developers can challenge fees and assessments from the city if they believe there are unnecessary costs.
“In San Jose it doesn’t usually get that egregious, but (financial assessments) are the first thing a developer looks at and asks, ‘Does this make sense?’” Snider told San José Spotlight. “The next and probably most important thing is, how quickly does the developer need the work to be done? If you need something done first before you can get your demolition equipment into the site — then you might make a decision to do the work yourself, even if it’s more expensive.”
One of the main reasons developers choose to pay in-lieu fees is certainty, because the burden of making physical improvements then falls on the city, she said. This avoids surprises that can increase costs.
“Even if developers think it’s too much money or it’s not really a fair assessment, it comes with certainty, so they might just decide to do it,” she said.
San Jose real estate and land use consultant Jerry Strangis said many developers find it more efficient and beneficial to the community to build the improvements themselves rather than pay fees.
Developers, whether in housing or business, have more expeditious timelines than the city. In regards to similar fees like the park impact in-lieu fee, Strangis said developers could build public benefits such as parks at a much faster and cheaper rate than the city.
“In specific cases, you get a bigger, better park as a result,” he told San José Spotlight. “In some cases, as a developer, it’s easier just to write a check and pay the fee along with a whole host of other fees to get your permit so you can build.”
Contact Vicente Vera at [email protected] or follow @VicenteJVera on X.