For decades, developers looking to build homes or offices in Palo Alto and elsewhere have had to pay impact fees to ensure the city's newest residents and employees won't diminish the quality of local parks, libraries and community centers.

Now, Palo Alto is considering a sharp increase that is already giving some City Council members sticker shock. The city is working with a consulting firm on a new nexus study, which examines the city's demographics, land value and breadth of community services and which is used to provide legal justification for the new fees. The draft of the study, which the council's Finance Committee discussed earlier this month, suggests that some of the impact fees could be raised by a factor of five.

The study's methodology, according to a report from the Community Services Department, ensures that the city's facilities are "appropriately developed and sized so that future residents and employees do not cause a reduction in LOS (levels of service) by unduly burdening the infrastructure system, thus leading to decay and deterioration."

Kristen O'Kane, director of the Community Services Department, said the city had decided in November 2019 to undertake the nexus study after recognizing that a change to the fee structure is long overdue. The city last revised its impact fees for parks, community centers and libraries about 20 years ago, she said at the Dec. 15 meeting of the council's Finance Committee.

The biggest change between then and now is the value of land. The existing fee structure is based on a valuation of $5.1 million per acre. The nexus study by the San Jose-based firm DTA proposes revising it up to $5.7 million. This would place the city in a higher tier among Santa Clara County jurisdictions, behind only Los Altos ($9.58 million) and Sunnyvale ($5.8 million).

The revision would have significant ramifications on the city's fee structure. Park impact fees, for example, would go up from the current level of $12,436 for a new single-family home to $59,461. For a new multifamily housing unit, the fee would go up from $4,116 to $43,997.

Commercial developers would also see a sharp increase, with the park fees going up from the current level of $5,281 for every 1,000 square feet of new development to $14,730.

While impact fees for libraries and community centers are much lower than for parks, they could also see a substantial hike. Library fees, for example, could be raised from $1,126 for a new single-family home — or $1,676 for a single-family home of more than 3,000 square feet — to $2,739 for both categories under the new fee structure. For a unit in a multifamily complex, the fee could be raised from the current levels of $370 (for units smaller than 900 square feet) and $674 (for those larger than 900 square feet) to $2,026.

Collectively, the impact fees in the three categories are projected to bring in about $3.1 million annually, according to staff. By contrast, the city only collected $1.1 million in revenues in fiscal years 2018 and 2019, with park fees making up $935,889 of that total.

Nate Perez, managing director at DTA, underscored that the new fees represent the maximum that the city can justifiably charge. The council will have the option of setting fees below the levels recommended in the nexus study or adopting a more gradual increase.

Perez attributed the large increases proposed in the study to the lengthy period of time that has elapsed since the last revision.

"The fee itself, in absolute dollar figures, is increasing quite a bit," Perez said. "I will note it hasn't been updated in 20 years, and we know how much real estate has gone up in 20 years, so the fact that land valuation has gone up similarly shouldn't be too surprising."

While he acknowledged that the proposed fees represent a significant "jump," he called the revision "reasonable" and "very, very highly defensible given the lag."

Council members, for their part, showed little appetite for raising fees so abruptly and dramatically. Vice Mayor Tom DuBois suggested that the council consider various options for phasing in the fee increase over time. Council member Liz Kniss supported raising the fees but similarly suggested that the process for doing so should be spread out over a number of years.

"They're pretty hefty," Kniss said. "It's our doing that we didn't do it before, but it shouldn't be foisted on our residents because we didn't do this before and suddenly we're going to make it up for the 20 years that we didn't do it."

By a 2-1 vote, the committee directed staff and DTA to come up with a list of options that the full council can consider for incrementally increasing the impact fees. Council member Greg Tanaka dissented and argued against raising the fees. Doing so, he argued, could discourage builders from developing in Palo Alto and hinder the council's ability to reach its goal of building 300 new housing units per year.

"My concern is that this makes a tough environment for housing even tougher — way tougher," Tanaka said. "I'm worried about the impact it will have, especially when this is one of the goals that we're trying to achieve."