Council narrows in-lieu housing fee to encourage smaller for-sale units, adopts 1,500 sq ft threshold

The City Council approved a resolution establishing new in-lieu fees for for-sale residential development and set a policy to encourage smaller for-sale 'missing middle' housing. Planning manager Desmond Perrington presented the study and staff recommendations, and council adopted a 1,500-square-foot threshold to reduce fees for smaller for-sale units.

Perrington told the council the city hired Economic & Planning Systems to analyze fee levels and feasibility across prototype housing products. Staff recommended shifting the in-lieu fee to a per-square-foot basis, aligning with historical practice (roughly 1% of sale price equivalent), and updating the fee annually with the construction cost index to retain purchasing power. Rental projects were exempted from the new in-lieu fee; staff and the housing manager emphasized that rental developments in the Folsom Plan Area are generally infeasible under current economics and thus were not charged.

For-sale prototypes examined in the study included large single-family homes (about 2,000–2,600 sq ft), attached townhome/condominium prototypes (~1,500 sq ft) and smaller rental apartments (~1,000 sq ft). The study found multifamily-for-sale products near 1,500 sq ft are “on the cusp” of feasibility. To encourage more starter for-sale units, council debated lowering or waiving fees on smaller units. After discussion and several substitute motions, the council set 1,500 square feet as the threshold for the reduced-fee policy that staff proposed.

Council members raised trade-offs: the mayor and some members argued a lower threshold or zero fee would better signal the city’s priorities and might shift developer behavior; others cautioned about shrinking the housing trust fund revenue and recommended monitoring results before further changes. Staff provided fiscal context: current in-lieu revenue into the housing trust fund is roughly $5,000,000 annually; exempting small for-sale units around the 1,500–1,900 sq ft band would reduce housing trust-fund receipts modestly (staff estimated about $250,000 per year if a broader threshold were used), and these impacts should be weighed against the incentive value.

The resolution adopts the per-square-foot fee structure, annual indexing, and the option for existing projects with previously approved inclusionary agreements to retain prior terms or opt into the new fee schedule with city approval. The measure aims to direct at least 50% of housing fund receipts toward construction of housing affordable to lower-income households, while retaining flexibility to use funds for land acquisition, gap financing, and targeted partnerships (for example Habitat for Humanity projects) to produce affordable for-sale units.