Mitigation Fee Act Applies to Developer’s Challenge of City’s Affordable Housing Set Aside Requirements

As required under its “inclusionary housing” ordinance, Palo Alto required a developer to set aside 10 condominium units as below market rate housing and make a cash payment to the City as a condition of obtaining a tentative subdivision map.  The developer proceeded with development but launched a challenge to the requirements in court.  The California Supreme Court held that the requirements imposed on the developer were “other exactions” within the meaning of the Mitigation Fee Act, specifically Government Code section 66020, and that the statute of limitations found in that statute applied to the developer’s challenge.  This ruling allows the developer to pay the disputed fees under protest, obtain building permits, and challenge the affordable housing requirements while the project is being constructed.  (Sterling Park, L.P. v. City of Palo Alto (--- P.3d ----, Cal., October 17, 2013).

Facts

Sterling Park, L.P., and Classic Communities, Inc. (collectively, “Sterling Park”) planned to demolish existing structures and build 96 residential condominiums in the City of Palo Alto (“City”).  The development Sterling Park proposed was subject to City’s below market rate housing program, which “requires that housing projects involving the development of five or more acres must provide at least 20 percent of all units as below market rate units.”

Sterling Park submitted an application for the project in 2005.  Sterling Park agreed to provide 10 below market rate units and pay 5.3488 percent of the actual selling price or fair market value, whichever was higher, as in-lieu fees.  City approved Sterling Park’s application.

As the new units were being finished, City requested conveyance of the homes that had been designated to meet the below-market-rate requirements.  Sterling Park submitted a notice of protest to City and filed a lawsuit seeking an injunction and a judicial declaration that the affordable housing requirements were invalid.  The trial court granted summary judgment to the City on the ground that Sterling Park’s action was untimely pursuant to Government Code section 66499.37, a part of the Subdivision Map Act mandating that actions challenging decisions regarding a subdivision must be brought within 90 days after the decision.  The court of appeal affirmed that decision.

Decision

The Supreme Court reversed the decision of the court of appeal finding that the limitations period contained in the Mitigation Fee Act governed this action, and not the Subdivision Map Act limitations period.  Government Code section 66020, which is part of the Mitigation Fee Act, provides in relevant part that “[a]ny party may protest the imposition of any fees, dedications, reservations, or other exactions imposed on a development project . . . by a local agency” if (1) the party tenders payment in full or provides evidence of arrangements to pay the fee, and (2) serves written notice on the governing body that includes the information required by the statute.

The issue before the Court was whether the requirements imposed on Sterling Park by City were “fees, dedications, reservations, or other exactions” within the meaning of section 66020.  The Court focused on whether the requirements are exactions.  In Trinity Park, L.P. v. City of Sunnyvale (2011) 193 Cal.App.4th 1014, the same court of appeal had held, “The meaning of the phrase ‘other exactions’ must therefore be limited to exactions of like kind and character as the fees, dedications and reservations listed in section 66020 that are imposed for the purpose of ‘defraying all or a portion of the cost of public facilities related to the development project’ . . .  or . . . to ‘alleviate the effects of development on the community . . . .’”  The Supreme Court concluded that the Trinity Park court’s interpretation of the term “other exactions” was too narrow.  (See our previous Legal Alert on the Trinity Park opinion).

The Supreme Court held that section 66020 “governs conditions on development a local agency imposes that divest the developer of money or a possessory interest in property.”  By contrast, section 66499.37 of the Subdivision Map Act governs “restriction on the manner in which a developer may use its property.”

The Court found that City’s below market rate program is different from a land use regulation and instead is similar to a fee, dedication, or reservation.  City’s action in compelling Sterling Park to give City a purchase option was an exaction within the meaning of section 66020.  After reaching this conclusion, the Court stated that it “need not decide whether forcing the developer to sell some units below market value, by itself, would constitute an exaction under section 66020.”

The Court concluded the applicable statutory scheme was the one that permits a challenge to City’s requirements while the project is being completed.  The Court reversed the decision of the court of appeal and remanded for further proceedings.  The Court, however, expressed no opinion on the merits of Sterling Park’s action or whether the action was timely filed pursuant to section 66020.

Note

The Supreme Court is set to hear another inclusionary housing case originating from the same court of appeal, California Building Industry Association v. City of San Jose, Case Number S212072.  The City of San Jose case presents the issue of which standard of judicial review should apply “to a facial constitutional challenge to inclusionary housing ordinances that require set asides or in-lieu fees as a condition of approving a development permit.”  In City of San Jose, the Supreme Court has an opportunity to more squarely address whether inclusionary housing ordinances are simply an exercise of a city’s police power (and thus subject to a fairly deferential standard of review), or whether a city must justify the ordinance by showing how it remediates the deleterious impacts of market-rate housing projects.