California Supreme Court Makes It Easier To Challenge Local Affordable Housing Requirements

by Perkins Coie

Under the Mitigation Fee Act, when a city imposes a fee, dedication, reservation or other exaction on a development project, the developer has the right to pay under protest, obtain the necessary project approvals and proceed with construction, while at the same time disputing the legality of the requirement.  On October 17, 2013, the California Supreme Court ruled that this procedure was available to challenge the City of Palo Alto’s inclusionary housing requirements.  Sterling Park, L.P. v. City of Palo Alto, Cal. S. Ct. No. S204771. 

To obtain approval for its 96-unit condominium project, the developer was required to set aside ten affordable units and give the city the option to purchase the units at below-market rates, which the city could then assign to qualifying buyers.  The developer also was required to pay in-lieu fees based on a percentage of the actual selling price or fair market value of its market-rate units, whichever was higher.  The developer agreed to comply and the city approved the project.  As the project was nearing completion a year later, the city requested conveyance of the affordable units, but the developer submitted a protest letter and, when the city failed to respond, filed a lawsuit. 

In dismissing the case as untimely, the court of appeal relied on a provision in the Subdivision Map Act (Govt. Code § 66499.37) that requires any lawsuit challenging a condition of a subdivision approval to be filed within 90 days of the approval.  Under this provision, the developer must delay construction until the dispute is resolved by the courts.  Relying on Trinity Park, L.P. v. City of Sunnyvale, 193 Cal. App. 4th 1014 (2011), the court of appeal ruled that the “pay under protest” provision of the Mitigation Fee Act (Govt. Code § 66020) is available only to challenge fees and exactions designed to defray the costs of public facilities related to the development project at issue, and that Palo Alto’s affordable housing requirements did not fit this description.

The Supreme Court reversed, ruling that the “pay under protest” provision governed.  The court found that Palo Alto’s requirement that the developer provide it with an option to purchase the ten affordable units amounted to an “exaction” under this provision.  The court explained that, in enacting the “pay under protest” statute, the Legislature did not want developers to be compelled to choose between either acceding to a disputed exaction with no recourse or delaying the project while challenging it.  The court observed that the interpretation set forth in Trinity Park conflicted both with this clear legislative intent and with the broad language in the statute, which encompasses “any fees, dedications, reservations or other exactions.” 

The decision, however, leaves several key questions unanswered.  First, the court did not address whether, in fact, the lawsuit was timely.  Under the “pay under protest” procedure, the developer must file a protest within 90 days after being notified by the city that the exaction is being imposed and the protest period has begun.  Here, the developer argued that since the city never provided this notification, the protest was timely.  But the Supreme Court expressly avoided this issue and remanded the case to the court of appeal to resolve it.

Second, the Supreme Court decided only that the “pay under protest” statute applies to Palo Alto’s requirement that the developer provide it with an option to purchase the affordable units.  The court found it unnecessary to decide whether forcing a developer to sell some units below market value, by itself, would constitute an exaction under the Mitigation Fee Act.

The court’s decision in Sterling Park is nevertheless noteworthy in that it removes a significant restriction on challenges to local affordable housing rules and thus provides developers with greater flexibility when faced with these types of requirements. 

The decision also may presage the outcome in California Building Industry Association v. City of San Jose, which currently is pending before the Supreme Court (Cal. S. Ct. No. S212072).  In that case, the Supreme Court has agreed to review the court of appeal’s decision upholding the City of San Jose’s affordable housing requirements.  The court of appeal had ruled that these requirements were not exactions, but instead were simply an exercise of the city’s police powers, a holding that appears at odds with the decision in Sterling Park.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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