California Impact Fees: Nexus, Timing, and How to Challenge

California impact fees are monetary charges that cities, counties, and special districts place on new development to pay for the public infrastructure that growth creates demand for. The Mitigation Fee Act, starting at Government Code Section 66000, sets the rules for how those fees are justified, adopted, collected, and spent. A 2024 U.S. Supreme Court decision, Sheetz v. County of El Dorado, added constitutional scrutiny on top of the statute, and it now applies to fee schedules adopted by ordinance, not just one-off conditions. If you are a developer paying a fee, or an agency imposing one, the rules below decide whether the charge holds up.

What Impact Fees Are and What They Fund

Under Section 66000, a development impact fee is a monetary charge other than a tax or special assessment that a local agency imposes on a developer in connection with project approval to cover all or part of the cost of related public facilities.¹ “Public facilities” is defined broadly and covers public improvements, public services, and community amenities.² In practice, that means roads, parks, water and stormwater systems, sewer infrastructure, fire and police stations, and libraries.

The line between a fee and a tax matters. A special tax needs a two-thirds vote of the electorate under California’s Constitution. Impact fees avoid that requirement because they are regulatory charges tied to a specific development’s burden on public services rather than general revenue. A fee that cannot show that link risks being invalidated as an unauthorized tax.

The Nexus and Proportionality Requirement

Every California impact fee has to satisfy two layers of scrutiny: the statutory rules in the Mitigation Fee Act, and the constitutional standard the U.S. Supreme Court has built through four cases.

The Constitutional Standard

In Nollan v. California Coastal Commission (1987), the Court held that a permit condition must further the same government interest that would justify denying the permit outright.³ Dolan v. City of Tigard (1994) added a second requirement: the burden placed on the property owner must be roughly proportional to the impact of the proposed development, and the government carries the burden of showing that.⁴ Koontz v. St. Johns River Water Management District (2013) extended both tests to monetary demands, which is what impact fees are.⁵

For years, California courts treated fee schedules adopted by ordinance as exempt from that scrutiny on the theory that legislation applies broadly rather than targeting one landowner. In Sheetz v. County of El Dorado (2024), the Supreme Court rejected that distinction, holding that the Takings Clause “does not distinguish between legislative and administrative land-use permit conditions.”⁶ The Court sent back to state courts the question of exactly how tailored a legislatively imposed fee must be. Post-Sheetz litigation has already produced at least one California trial court decision invalidating a fee program, so fee schedules resting on thin nexus studies are exposed.

The Statutory Standard

Section 66001 codifies much of the same idea. When an agency establishes, increases, or imposes a fee, it must:

Identify the fee’s purpose.
Identify the use, tied to specific public facilities through a capital improvement plan, general plan, specific plan, or other public document.
Show a reasonable relationship between the fee’s use and the type of development being charged.
Show a reasonable relationship between the need for the facility and the type of development being charged.

The fee itself must be reasonably related to the cost of the facility or portion of the facility attributable to the specific development.⁷ And no fee may exceed the estimated reasonable cost of providing the service or facility it funds.⁸

Agencies document that showing through a nexus study. Section 66016.5 requires the study to be adopted before the fee takes effect and updated at least every eight years.⁹ Stale studies with outdated cost figures or demographic projections are the most common weakness in fee programs, and after Sheetz, that weakness is easier to exploit.

How Agencies Adopt or Increase a Fee

Procedural shortcuts can undo an entire fee program. Under Section 66016, the agency must hold at least one open public meeting as part of a regularly scheduled session. Notice of the time, place, and subject matter must be mailed at least 14 days in advance to anyone who has filed a written request for it. Cost data and anticipated revenue sources must be available to the public at least 10 days before the meeting.¹⁰ For nexus study adoptions, AB 602 (2021) raised the public hearing notice requirement to at least 30 days.

Adoption or increase must be by ordinance or resolution, and the governing body cannot delegate that authority.¹⁰ A new or increased fee cannot take effect sooner than 60 days after the governing body’s final action. A 2026 trial court decision involving the City of Patterson invalidated a program in part because the city posted a revised nexus study less than 90 minutes before the hearing.

When the Fee Has to Be Paid

The timing of collection is one of the most misunderstood parts of the statute. For residential development, Section 66007 prohibits a local agency from collecting fees before the date of the final inspection or the date the certificate of occupancy is issued, whichever comes first.¹¹ The fee is imposed as a condition of approval much earlier, but payment is deferred.

Two exceptions let the agency collect sooner. The first applies when the agency has established an account with appropriated funds and adopted a construction schedule for the improvements, or when the fees are reimbursing the agency for money it has already spent.¹¹ The second is that utility connection fees can be collected when the developer applies for service.

Deferred Collection for Certain Housing

SB 937 (2024) added Section 66007(c), which gives more favorable timing to “designated residential development projects.” Those include 100-percent affordable housing, density bonus projects, low-barrier navigation centers, and projects with 10 or fewer units. For those projects, the agency cannot collect fees until the first certificate of occupancy or first temporary certificate is issued, whichever comes first, and it must charge the same amount the developer would have owed at the building permit stage, without interest or additional charges on the deferred amount.¹¹ The effect is to cut carrying costs on smaller and affordable projects.

Where the Money Goes and the Five-Year Rule

Impact fee revenue cannot be mixed with the agency’s general fund. Section 66006 requires every dollar to be deposited into a separate capital facilities account. Any interest earned stays in the account and can only be spent on the purpose for which the fee was originally collected.¹²

Within 180 days after the end of each fiscal year, the agency must produce a public report for every fee account, showing the fee, beginning and ending balances, collections, interest, what was funded, any interfund transfers or loans, and any refunds.¹² The information must then be reviewed at the next regularly scheduled public meeting held at least 15 days after the report is available.

The rule that catches agencies out is Section 66001’s “use it or lose it” requirement. For the fifth fiscal year after the first deposit into an account, and every five years after that, the agency has to make formal findings on any remaining funds. Those findings must identify the fee’s purpose, show that a reasonable relationship still exists between the fee and that purpose, list the funding sources needed to complete unfinished improvements, and estimate when that funding will arrive.⁷

Miss the deadline and the unexpended money has to be refunded to the current property owners on a pro rata basis.⁷ The five-year clock runs on its own, and there is no way to cure the failure after the fact.

How to Challenge a Fee

Section 66020 gives developers and property owners a way to challenge a fee they think is unlawful or excessive, but the process is strict. Miss a step and the right to challenge is gone.

Start by paying the fee in full, or providing satisfactory evidence that payment arrangements are in place. At the same time, serve written notice on the governing body stating that the payment is under protest, describing the factual basis for the dispute and the legal theory behind it. The protest has to be filed at the time of project approval or within 90 days after the fee is imposed.¹³

Filing a protest cannot be used against you. The statute prohibits a local agency from treating a protest as a basis for denying a map, permit, zone change, or any other approval related to the project.¹³

The protest is only step one. To keep the challenge alive, you also have to file a court action within Section 66020’s statute of limitations. Waiting until the project is built is not an option, so counsel should be involved from the moment the fee is imposed rather than after the deadline runs.

Charges the Mitigation Fee Act Does Not Govern

Not every payment a developer makes is an MFA fee, and applying the wrong framework will sink a protest. Several categories sit outside the statute:

Park dedication fees collected under Section 66477 (the Quimby Act) in connection with subdivision approvals follow their own rules.¹
Processing and permit fees for the agency’s cost of reviewing applications are excluded from the MFA, though a separate cost-reasonableness standard applies.
Development agreement fees have their own statutory authority and do not go through MFA procedures.¹
Water and sewer connection fees are governed by Section 66013. They still have to meet a cost-reasonableness standard and follow certain public hearing rules, but they are not subject to the MFA’s nexus study, five-year findings, or segregated account rules.¹⁴

Identifying which framework applies is the first move for anyone thinking about a challenge, and for any agency drafting a new fee. A protest built around Section 66020 will fail if the charge is actually a Section 66013 connection fee or a Quimby Act dedication.

1
California Legislative Information. California Code GOV 66000 – Fees for Development Projects
2
California Legislative Information. California Code GOV 66000 – Definitions
3
Justia. Nollan v. California Coastal Commission
4
Justia. Dolan v. City of Tigard, 512 U.S. 374
5
Justia. Koontz v. St. Johns River Water Mgmt. Dist.
6
Justia. Sheetz v. El Dorado County
7
California Legislative Information. California Code GOV 66001 – Establishing, Increasing, or Imposing Fees
8
California Legislative Information. California Code GOV 66005 – Limitations on Fees
9
California Legislative Information. California Code GOV 66016.5 – Impact Fee Nexus Study Requirements
10
California Legislative Information. California Code GOV 66016 – Fees and Service Charges
11
California Legislative Information. California Code GOV 66007 – Fees on Residential Development
12
California Legislative Information. California Code GOV 66006 – Deposit and Reporting Requirements
13
California Legislative Information. California Government Code 66020
14
California Legislative Information. California Code GOV 66013 – Water and Sewer Fees