Court Rejects Takings Challenge to City’s Imposition of $600,000 in Fees for 11-Unit Infill Project

by Miller Starr Regalia
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On September 23, 2016, the Court of Appeal for the Second Appellate District affirmed a trial court decision denying a petition for writ of mandate filed by a developer challenging various fees—totaling nearly $600,000—in connection with an 11-unit subdivision and condominium complex in West Hollywood.  616 Croft Ave., LLC v. City of West Hollywood, __ Cal.App.5th __ (2016) (Case No. BC498004).

The case is the first reported appellate decision to rely upon the broad holding of the California Supreme Court’s blockbuster 2015 affordable housing case, California Building Industry Assn. v. City of San Jose, and it boldly highlights the far reaching implications of that ruling.  In my opinion, it also underscores the ongoing need for the United States Supreme Court to finally address whether the heightened scrutiny of the Nollan, Dolan, and Koontz Fifth Amendment takings cases applies to legislatively imposed permit conditions.  We wrote about that issue earlier this year after the U.S. Supreme Court denied certiorari in the CBIA case, and we note that the Court will soon have another opportunity to grant certiorari on this important issue.

616 Croft Ave. arose out of the City of West Hollywood’s approval of an infill project involving the demolition of two existing single-family homes and the construction, in their place, of an 11-unit condominium development.  The City expressly conditioned the project’s subdivision map upon payment of the fees in effect at the time of building permit issuance.  The project was delayed for several years due, in part, to the economic downturn that began in 2007.  The City extended the project approvals several times, at the developer’s request, and also revised its fee schedule.  By the time the developer finally requested its building permits, in 2011, the in-lieu housing fee had nearly doubled to $540,000.  The fee schedule also required the developer to pay approximately $36,000 for parks and recreation under the Quimby Act, $675 for waste water mitigation, and $4,000 for traffic mitigation.

The developer paid the fees “under protest” pursuant to the Mitigation Fee Act, alleging that the City was unjustified and premature in its collection of the fees, and sued the City.  The MFA applies when “a monetary exaction other than a tax or special assessment . . . is charged by a local agency to the applicant in connection with approval of a development project for the purpose of defraying all or a portion of the cost of public facilities related to the development project . . . .”

On appeal, the developer argued that the fees are invalid both generally and as applied to it under Nollan and Dolan.  The developer also argued that the trial court improperly shifted the burden of proof from the City to the developer and that the City failed to carry its burden of showing that the fees were reasonably related to public needs caused by the project.

The Court of Appeal rejected the developer’s facial challenge to the ordinance and adopted fee schedule as time barred under the 90-day statute of limitations established in Government Code section 65009.  The Court noted that the 90-day limitation applies even if the facial challenge is part of an as-applied challenge.  The Court of Appeal rejected the developer’s as-applied challenge that the City had the burden to prove its fees were reasonable under the MFA, the California Constitution, and its own municipal code.

With respect to the in-lieu housing fee, the Court relied on California Building Industry Assn. v. City of San Jose, which held that a legislatively imposed affordable housing set-aside requirement was not an “exaction” under Nollan and Dolan.  Instead, according to the state Supreme Court, such a requirement “is an example of a municipality’s permissible regulation of land under its broad police power.”

The Court of Appeal thus held that the in-lieu housing fee—which is an alternative to providing on-site affordable housing as part of the project—logically cannot depend on whether the amount of the fee is reasonably related, under Nollan and Dolan, to the project’s alleged impact on the City’s affordable housing need.  As a result, the Court ruled that the MFA does not apply to the in-lieu fee.

The Court rejected the developer’s argument that if the fees are not exactions they are special taxes masquerading as fees and the City thus bears the burden of proving otherwise under articles XIII C and XIII D of the California Constitution.  The Court noted that the fees are not deposited into the general fund; the fees are not used to offset the increased demand for public services; the fees are not imposed on the land, but rather on building residential developments; the fees are not compulsory because developers could choose the set-aside option or to build a different type of development; and, finally, the fees do not impact government spending.  The Court thus held, as have others before it, that these types of fees are a condition of property development, not a special tax.

The Court also rejected the developer’s argument that the West Hollywood Municipal Code itself requires the City to prove reasonableness, because the code allows for the “adjustment, reduction, postponement, or waiver of that fee based upon the absence of a reasonable relationship between the impact of that person’s commercial or residential development project on the demand for affordable housing” (emphasis added).  The Court concluded that the provision does not necessarily place the burden on the City to demonstrate reasonableness, and the Court refused to shift the burden to the City absent evidence (and apparently absent the plain language of the ordinance) it was the City’s intent to do so.

The Court noted that the developer mischaracterized the nature of the reasonableness inquiry and failed to present evidence relating to the correct inquiry.  In particular, the developer argued that the City was required to prove, dollar for dollar, that the fee it charged was proportional to the negative impact the project had on the demand for affordable housing.  Relying again on California Building Industry Assn. v. City of San Jose, the Court reasoned that the inquiry is not about the reasonableness of the individual calculation of fees related to a particular project’s impact on affordable housing but rather on the reasonableness of the fee schedule itself.  In other words, the restrictions must be reasonably related to the broad general welfare purposes for which the ordinance was enacted.  Here, according to the Court, “[t]he inquiry is whether the fee schedule itself is reasonably related to the overall availability of affordable housing in West Hollywood.”

In addressing the reasonableness inquiry, the Court demonstrated precisely why the U.S. Supreme Court should soon address this issue.  Under the authority of California Building Industry Assn. v. City of San Jose, the Court correctly held that combatting the lack of affordable housing by promoting the use of available land for the development of housing that would be available to low- and moderate-income households does not violate the Takings Clause.  The Court reasoned, however, that “[t]his is especially true when the regulation, like the one here, broadly applies nondiscretionary fees to a class of owners because the risk of the government extorting benefits as conditions for issuing permits to individuals is unrealized.”  That dubious rationale runs headlong into the Justice Clarence Thomas’ logical conclusion, in Parking Assn. of Georgia, Inc. v. Atlanta, 515 U. S. 1116, 1117 (1995) (Thomas, J., dissenting from denial of certiorari), that the existence of a taking should not turn on the type of governmental entity responsible for the taking and that the general applicability of the ordinance should not be relevant in a takings analysis.

The Court of Appeal held that the City properly calculated the parks and recreation fee under the Quimby Act, which requires such fees to be based upon the “residential density.”  The developer argued that the City was required to calculate the fee based on the net number of units, not the total, but the Court noted that the developer did not cite any law regarding a “net” exception to the Quimby Act’s broad language.

Finally, the Court rejected the developer’s argument that the City collected the fees too early, based on the MFA’s requirement that  “most fees imposed on residential development projects may not be demanded any earlier than the time of completion [of] either (a) final inspection or (b) certificate of occupancy.”  Having concluded that the MFA does not apply to the in-lieu fee, the Court refused to hold that the City collected the fees too early.  With respect to the parks and recreation fee, the Court also noted that the MFA contains an exception that allows the City to collect fees to reimburse itself for expenditures previously made.  The Court thus upheld the timing of the City’s collection of the parks and recreation fee based on a single statement in the administrative record that the fees were used to offset recent renovations to a nearby 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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