How Agencies Can Navigate the Changes to the Mitigation Fee Act Part 1: SB 937 and SB 499

12.1 minute read

January 26, 2026

The Mitigation Fee Act (implemented through Assembly Bill 1600 and codified in California Government Code §§ 66000–66025) establishes the legal framework that governs how local agencies may impose development impact fees on new development. Its core purpose is to ensure that fees charged to developers are reasonably related to the public facilities or improvements needed to serve new development, and that the amount of the fee is proportional to the project’s impact. The Mitigation Fee Act requires local agencies to establish development impact fees by clearly identifying the purpose of each fee, specifying how the fee revenues will be used, and demonstrating the reasonable relationships that must exist between the fee and the development on which it is imposed, including the relationship between the fee’s use and the type of development project, the relationship between the need for the public facilities and the development project, and the relationship between the amount of the fee and the cost of the facilities or facility components attributable to that development. The Mitigation Fee Act also imposes strict transparency and accountability standards, such as separate accounting of fee revenues, limitations on how those revenues may be spent, and mandatory annual and five year reporting. In recent years, several new bills became law that affect how agencies implement the requirements of the Mitigation Fee Act. Harris & Associates has put together a multi-part series on how agencies can navigate the changes to the Mitigation Fee Act.

California Senate Bill 937 (SB 937), which became effective on January 1, 2025, and California Senate Bill 499 (SB 499), approved by the Governor in October 2025, both aim to boost housing production by easing regulatory and financial barriers for developers to build affordable housing and small-scale residential projects. The bills seek to incentivize affordable and infill housing production by enacting the following for qualifying “Designated Residential Development Projects:”

• Delaying the collection of development impact fees until a Certificate of Occupancy or Temporary Certificate of Occupancy is issued, whichever occurs first. It should be noted that fees must be paid if construction does not commence within five years of permit issuance.
• Freezing development impact fee amounts at the rate in effect at the time of building permit issuance.
• Prohibiting interest accrual on the deferred fees.
• Extending housing entitlements by 24 months for projects approved prior to January 1, 2024, and set to expire on or before December 31, 2025.

The agency may require payment of fees or charges at an earlier time if either of the following conditions are met:

1. The fees are to reimburse the local agency for expenditures previously made to the extent they have not been paid or reimbursed by another party.
2. The fees or charges will be collected for any of the following public improvements and an account has been established and funds appropriated for the public improvements:
   1. Water, Wastewater or Sewer service fees and charges related to connections provided they do not exceed the costs incurred by the utility provider resulting from the connection activities.
   2. Transportation improvements that serve the development, such as roads, sidewalks, and other facilities used to move people, including the purchase of land, easements, or rights-of-way needed to build those improvements.
   3. School facilities, including the construction or rehabilitation of schools, as long as the school district has adopted an approved five-year school facilities master plan.
   4. Fire, public safety, and emergency services infrastructure to serve the development, including certain parks or recreational facilities—but only when those parks or open spaces are specifically identified for an emergency purpose (such as evacuation areas, emergency staging, or wildfire response), not just for general recreation or aesthetics. These facilities must be identified in the local agency’s safety element or local hazard mitigation plan.

A local agency may require property owners to enter into a contract for the payment of the deferred development impact fees. If the local agency requires property owners to enter into a contract, they must post an example contract on their website.

Eligibility: Designated Residential Development Projects

To be eligible under SB 937, a Designated Residential Development Project must meet at least one of the following criteria:

1. 100% Affordable Housing (Gov. Code § 66007(c)(4)(A))

All units (except a manager’s unit) are reserved for lower-income households (as defined by Health & Safety Code §50093).

Requirements:

• Deed-restricted affordability for 55 years (rental) or 45 years (ownership).
• Income requirements per Health & Safety Code §50093.

2. Low Barrier Navigation Center (Gov. Code § 66007(c)(4)(B) / § 65662)

The project meets standards for Low Barrier Navigation Center Development as defined in § 65660, which is a use by right in areas zoned for mixed use and non-residential zones that permit multi-family uses when the following requirements are met.

Requirements:

• Offers services to connect people to permanent housing through a services plan that identifies services staffing.
• Tied to a coordinated entry system (such as those used by Continuums of Care).
• Complies with Welfare & Institutions Code §8255, which outlines the tenants of the Housing First model.
• The developer or owner will report data into Homeless Management Information System (HMIS).

3. Commercial Corridor / Zone Housing (Gov. Code Commencing with Section 65912.110 or Article 2 Commencing with Section 65912.120 of Chapter 4.1)

The project meets the site-specific requirements and affordability criteria pertaining to affordable housing developments located in commercial zones or mixed-income housing developments, according to the following requirements:

Requirements for 100% Affordable Housing in Commercial Zones

• 100% of units are affordable (excluding the manager’s unit).
• Located in a commercial zone or mixed-use zone.
• Must meet objective local development standards.
• Not located in a very high hazard severity zone.
• No displacement of affordable or historic housing.

Requirements for Mixed-Income Multi-Family Housing on Commercial Corridors

• At least 15% of units are affordable for lower income households. Or at least 8% of the units are designated for very low-income households and 5% of the units for extremely low-income households.
• Located in commercial corridors.
• Must meet objective local development standards.
• No displacement of affordable or historic housing.

4. Multi-Family Housing Development Subject to Streamlined Ministerial Approval (SB 35) (Gov. Code § 65913.4 / SB 35)

The project is a multifamily housing development subject to a streamlined ministerial approval process and not subject to a conditional use permit or other discretionary approval. A multifamily housing project is subject to such streamlined, ministerial approval if it satisfies all of the following requirements:

Requirements:

• The project is a multifamily housing development that contains two or more residential units.
• The project is in a jurisdiction that either lacks a compliant Housing Element or has insufficient building permits compared to Regional Housing Needs Assessment (RHNA) needs.
• The project and the site satisfy certain criteria, including that the site is a legal parcel located in an urbanized area, is located next to other urban sites, and is mostly zoned for residential use.
• The project includes affordable units (amount depends on project type and location) with covenant restrictions.
• Project is consistent with objective zoning, subdivision, and design review standards.
• The project is not located in excluded areas (wetlands, farmland, flood hazard, conservation area, fire zones, etc.).
• The developer complies with contractor/labor requirements.
• The project is not located on a site that would require the demolition of certain types of existing housing subject to rent or price control, recently demolished housing, a historic structure, or currently occupied by tenants for the last ten years.
• The project is exempt from prevailing wage requirements if it consists of 10 or fewer units and is not a public works project.
• The project does not exist upon a site governed by the Mobile Home Residency Law, the Recreational Vehicle Park Occupancy Law, the Mobile Home Parks Act, or the Special Occupancy Parks Act.

5. Affordable Housing on Faith or Higher Education Lands Act of 2023 (Gov. Code § 65913.16 / SB 4)

The project meets the criteria specified in the Affordable Housing on Faith and Higher Education Lands Act of 2023, a law that states that a housing development project built on land owned by either a college or religious institution is a use by right if it meets certain requirements, including:

Requirements:

• The development is located on land owned before January 1, 2024, by a college or religious institution, including ownership through an affiliated non-profit.
• 100% of units are designated affordable units; up to 20% of units can be for moderate income households; and up to 5% may be for staff of the college or religious institution.
• The project site is located in urbanized areas or urban cluster at least 75% of the perimeter of the site adjoins parcels developed with urban uses.
• The project is not located adjacent to hazardous areas, prime farmland, wetlands, delineated earthquake fault zone, flood hazard area, floodway, conservation area, oil refinery, natural gas refinery, heavy industrial use.
• The site cannot be adjoined to any site where more than one third of the acreage is dedicated to light industrial use.
• The housing units are not located within 1,200 feet of heavy industrial use or a site that was recently heavy industrial use.
• The housing units are not located within 1,600 feet of a site that is or was recently a Title V industrial use. A Title V industrial use is a stationary source required by federal law to be included in an operating permit program established pursuant to Title V of the federal Clean Air Act.
• For a site where multifamily housing is not an existing permitted use, the housing units on the development site are not located within 3,200 feet of a facility that actively extracts or refines oil or natural gas.
• The project meets local objective development standards.
• If the project requires the demolition of existing residential dwelling units, or is located on a site where residential dwelling units have been demolished in the past five years, the applicant shall comply with Section 66300 (d).
• The applicant certifies to the local government that either of the following is true for the project:
  • The entirety of the project is a public work; or
  • The development contains more than ten (10) units and is not a public work project in its entirety, it is subject to prevailing wages.
• The project proponent completes a Phase 1 environmental assessment and a Phase II environmental assessment (if warranted) and either mitigates or removes any hazardous substance (if necessary).
• If the project is within 500 feet of a highway, they must provide air filtration that provides a minimum efficiency reporting value (MERV) of 13.
• If the project is on a vacant site, it does not contain any tribal cultural resources that cannot be mitigated by CEQA.

6. Density Bonus Projects (Gov. Code § 65915 / § 66007(c)(4)(F))

The project is entitled to a density bonus, which is awarded if the housing development contains one of the following:

Eligibility Options:

• 10% of units for lower-income households; or
• 5% of units for very low-income households; or
• 10% moderate-income for ownership; or
• 100% lower income (or 80% lower + 20% moderate); or
• The project is a senior citizen housing development or senior mobile home park; or
• 10% of the units are for transitional foster youth, disabled veterans, or homeless persons, provided at very low-income levels and are subject to a recorded affordability restriction of 55 years; or
• 20% of the units are for lower income students in a student housing development that prioritizes lower income students experiencing homelessness. All units of the development are exclusively for students. The rent shall be calculated at 30% of 65% of the area median income for a single room occupancy type; or
• 100% of all units are for lower income households, except that up to 20 percent of the units may be for moderate-income households.

7. Small Projects (Gov. Code § 66007(c)(4)(G))

If the project has ten (10) or fewer residential units, it is considered a Designated Residential Development Project.

What SB 937 and SB 499 Mean for Municipalities and Special Districts

While incentivizing affordable housing production for developers, SB 937 may introduce operational challenges for agencies by shifting additional financial burdens to local municipalities and districts.

1. Reduced Upfront Cash Flow. Deferred fee collection delays critical funding for public improvements. This can disrupt capital improvement schedules and require agencies to find alternative funding sources to keep projects on track. Without such planning, cities risk cash-flow shortfalls and disruptions in meeting service and capital needs that depend on those fees.
2. Adjusted Capital Improvement Planning. Agencies must now reconcile delayed revenues with ongoing infrastructure needs, which may require re-prioritizing projects or relying on reserves.
3. Identify Additional Funding Sources. Because jurisdictions now may not receive certain DIFs until much later in the development process, they may need to identify and secure additional funding sources, such as general fund transfers, bonds, grants, or other revenue streams, to cover costs that impact fees previously helped pay for up front, especially for infrastructure improvements that must be planned and constructed before a project is complete.
4. Compliance and Administration. SB 937 imposes new administrative requirements, including the development of standardized deferred payment contracts and public posting of these documents on their website. Agencies must also track deferred fees over extended timelines.
5. Update Safety Elements and Local Hazard Mitigation Plans. SB 499 clarifies that certain impact fees may be collected at the time of permit issuance if facilities are part of emergency infrastructure. The bill recognizes that during disaster, parks and recreation facilities serve more than aesthetic or general recreational roles. Facilities can function as emergency infrastructure such as cooling/heating centers, evacuation staging areas, fuel-breaks, or gathering places for coordinated response. However, it is critical that these facilities are recognized in an adopted plan, such as a Safety Element or Local Hazard Mitigation Plan.

SB 937 represents a shift in California’s approach to affordable housing development, placing new demands on public agencies to fund infrastructure while accommodating deferred payments. While these changes aim to address the state’s housing crisis, they also require thoughtful implementation to avoid disruptions to essential services. If you have questions about how SB 937 affects your organization, reach out to Harris and Associates. Our Municipal and District Finance team can help you navigate this bill and the impacts on your agency.

Note: This guidance sheet provides a summary and should be used for general reference only. Final eligibility is determined based on site-specific details, applicable local ordinances, and legal interpretation of State law.

Authors

Megan Quinn

Director / Municipal + District Finance

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