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California Eminent Domain Report

"…nor shall private property be taken for public use, without just compensation."

It’s Baaacckkkk…. Redevelopment Returns to California

Posted in Redevelopment

redevelopmentWe’ve been closely watching Assembly Bill 2 work its way through the legislature for most of 2015, and last week, it was finally signed by the Governor.  What does it mean?  You can find a detailed analysis by my partner, Bernadette Duran-Brown, in our recent E-Alert, but generally, it means redevelopment is back in California.

AB2 allows local governments to create Community Revitalization and Investment Authorities (CRIAs), which will have the power to issue bonds, provide low-income housing, prepare and adopt a revitalization plan for an area, and acquire property using the power of eminent domain.  Once a CRIA is established (through a city, county, special district, or a joint powers agreement), a board will be established, which must include at least two members of the public who live or work in the area.

CRIAs, like former redevelopment agencies, can freeze property taxes of an area and then collect the increased tax increment to use on revitalization activities.  However, in an effort to curtail redevelopment abuse, the taxing entities in the plan area, like cities, counties and special districts, must agree to divert the tax increment to the CRIA.

It’s not clear at this point how CRIAs will positively or negatively impact disadvantaged communities.  Moreover, in a potential competition with CRIAs, Governor Brown also signed AB313 on September 22, which enhances the powers of Enhanced Infrastructure Financing Districts (EIFDs), another type of tax increment financing entity the Legislature created last year.  Will the EIFDs and CRIAs be fighting over the same pot of funds, or will they complement one another, giving local governments even more strength to implement public projects?

Stay tuned as we delve deeper into AB2 and see how it plays out in 2016.

Legislative Update: AB2 Passes Both Assembly and State Senate

Posted in Redevelopment

Back in May, we provided an update on the status of AB2, the bill which would create Community Revitalization Investment Authorities, (see here).  Things were relatively quiet over the summer but this month has the bill seeing a lot of action: It was passed by the state senate on September 9, passed by the assembly on September 12 and has been sent for final review before hitting the governor’s desk for signature.  As we discussed previously, Governor Brown vetoed the last iteration of this bill because the bill vested the program in redevelopment law, and the new bill does not.  While he has made comments that he could possibly support an “economic development program…that focuses on disadvantaged communities with high unemployment”, it is unclear whether Governor Brown will be supportive of this bill.  A recent San Diego Tribune article looks at the legislative and legal maneuvering that has taken place since the elimination of redevelopment agencies between the legislature and the governor and is worth a read.

It shouldn’t be long before we get Governor Brown’s opinion of AB 2. We will keep you posted!

Condemnation Projects Everywhere!

Posted in Projects

Public agencies in California are once again getting busy with new projects.  It seems at every event I attend all the right-of-way professionals, appraisers and eminent domain attorneys tell me they’re fully occupied.  Recent news articles support this conclusion.

For example, according to an article in the Orange County Register, Santa Ana council OKs EIR moving forward on Warner Avenue widening using eminent domain, the City of Santa Ana has adopted a final environmental impact report for the Warner Avenue Improvement Project, which will reconfigure the road from Main Street to Grand Avenue, and ultimately require the acquisition of 31 full residential, six partial residential, two full commercial and 13 partial commercial properties.  Given the public opposition, the City is already planning on having to use eminent domain for the acquisitions.  The partial acquisitions are usually the most controversial, as property owners have disputes as to damages to their remaining property and impacts from construction of the proposed project.  Similarly, the acquisition of commercial properties bring the possibility of business losses, which are typically subject to a wide discrepancy in valuation opinions.

Similarly, according to an article in the Hi-Desert Star, Water district takes first steps toward eminent domain for easements, the Hi-Desert Water District is in the process of building a new sewer collection system, which will require the acquisition of 353 easements just for the first phase of the project.  The District has already successfully negotiated 216 acquisitions, but 96 remain unresolved, and where negotiated settlements could not be reached, the District’s Board of Directors adopted a resolution of necessity in order to use eminent domain to acquire the easements.  A number of property owners have raised concerns about how the proposed acquisitions will impact the ability to develop their properties, but the District must push forward with condemnation as its loan for the project is contingent upon having all necessary property interests under control.

Finally, according to an article in the Manteca Bulletin, Manteca seeks right- of-way for interchange, the City of Manteca is getting ready to take steps to obtain the right-of-way needed to convert the McKinley Avenue undercrossing of the 120 Bypass into a full-scale interchange.  The property acquisitions are expected to cost $4 million to complete the project.  Once complete, the project will improve traffic circulation in the area.  But interchange projects typically result in significant impacts to nearby properties, so it will be interesting to see whether Manteca has prepared a realistic right-of-way budget.

Stay tuned to see what’s next on the horizon.

What Happens When the United States Condemns a Street, Road or Public Highway?

Posted in Court Decisions

Generally when the United States takes property pursuant to its eminent domain authority, “just compensation” is based on the market value of the property on the date of the taking.  However, when acquiring a street, road or public highway, the public entity whose property is taken is entitled to compensation “only to the extent that, as a result of such taking, it is compelled to construct a substitute highway.”  (Washington v. United States, 214 F.2d 33, 39 (9th Cir. 1954), emphasis in original.)  Where it is unnecessary to replace or provide a substitute, the public entity is only entitled to nominal compensation.  The question of whether a replacement facility is “reasonably necessary” is a question for the Court.  However, the Court of Appeal for the Ninth Circuit has yet to address the question of – where only a portion of property is taken – whether compensation for the replacement facility is the sole basis of compensation or whether a condemnee could also be entitled to severance damages.

In United States of America v. 1.41 Acres, No. C 14-01781, 2015 U.S. Dist. LEXIS 107484 (N.D. Cal. August 14, 2015), the United States condemned McKay Avenue in Alameda County from the State of California.  The United States brought a motion for summary judgment on the issue of just compensation, claiming that defendants the State of California, acting by and through the Department of Public Works, and East Bay Regional Park District were not entitled to severance damages but only to nominal damages.  The Court denied the motion for summary judgment as to both issues.

Factual Background

The United States originally owned McKay Avenue in fee, subject to several easements for the benefit of nearby property owners.  In 1961, the United States transferred ownership of McKay Avenue, along with over 90 acres of land, to the State of California, subject to the recorded easements and an easement in favor of the United States for “non-exclusive street use.”  The State of California developed the site into a state-owned beach and park, which the Park District operates.  McKay Avenue provides primary access to the state beach, along with 70 parking spaces for public use.

The United States condemned McKay Avenue in fee, subject to “any exiting rights of ingress and egress benefiting adjoining property,” and subject to “a non-exclusive easement for pedestrian and vehicular ingress and egress” in favor of defendants.

Substitute Facility

In support of its summary judgment motion, the United States argued that no substitute facility is “reasonably necessary” because the United States reserved sufficient rights to defendants and surrounding landowners to obviate any need for a substitute facility.  The Court rejected this argument because the reservation of easement in favor of defendants was not for “street use” but rather for “ingress and egress,” and the parking rights derived from the State of California’s prior ownership of McKay Avenue.

The United States also argued that the possibility that it may prevent defendants from using McKay Avenue for parking purposes in the future is too speculative to find that construction of a substitute facility is “reasonably necessary.”  Defendants countered that a condemnee is entitled to measure just compensation based on the “most injurious use” of the condemned property.  The Court agreed and found that it is appropriate to consider the need for a substitute facility based on the rights actually condemned, rather than based on an unreliable assumption that the current permissive use will exist in perpetuity.  The court noted that this analysis could result in a windfall to defendants – who potentially could continue their use of the parking; however, it could conversely result in a windfall to the United States, which “easily could have been avoided by reserving a parking easement for the benefit of defendants.”  The Court denied the motion for summary judgment.

Severance Damages

In addition to the compensation for McKay Avenue itself, defendants contend that they are also entitled to severance damages for the diminution in value of the state beach as a result of the taking.  The United States argued that the replacement facility analysis is meant to serve as the exclusive measure of compensation.

In opposition, the United States cited to two Supreme Court cases where the Court held that just compensation for the condemnation of a public facility where there is no market is the actual cost of constructing a necessary substitute facility.  The Court rejected the United States’ argument that these cases also stand for the proposition that the cost of a substitute facility is the only measure of damages, even where other damages result beyond the loss of a facility.

One District Court in the Ninth Circuit has concluded that the state was entitled to compensation for costs incurred in excess of the costs of constructing a substitute facility.

Here, the Court held that a jury could find defendants have suffered harm to their property interest beyond what can be accounted for by the construction of a substitute for McKay Avenue.  Therefore, the Court held that defendants are entitled to present their case to the jury for compensation for both (1) the loss of the facility of McKay Avenue itself, and (2) the diminution in value of the state beach as a result of the condemnation.


For those public agencies whose street, road or highway is condemned by the United States, the law is not firm on whether the agency is entitled to both (1) compensation for a “reasonably necessary” replacement facility, and (2) other monetary damages.  However, there are strong arguments discussed in the recent District Court case to support an argument that – where the street, road or highway is part of a larger parcel –just compensation includes both the cost of the replacement facility and severance damages.

Eminent Domain for Public Improvements Supporting Private Development Projects

Posted in Right to Take

COM-E.D.-Harmony-263x300With the improving real estate economy, there have been an influx of new large development projects throughout California.  With these new proposed developments, it is common for local government agencies to require public improvements — such as streets or utilities — to support the influx of traffic and people to a previously undeveloped area.  Those public improvements commonly take place off the developer’s property, so what happens if surrounding property owners do not want to sell their land to support such improvements for a private development?  Can eminent domain be utilized, and if so, how does it work?

A recent example of this situation appears in an article in last week’s Voice of San Diego titled Developer and County May Seize Private Property for Lilac Hills Development Project.  According to the article, the County of San Diego has conditioned approval of a new 600-acre, 1,700-home project on the developer’s widening two existing roads that border the project.  In order to do so, the developer will be required to acquire several private properties from owners who are unwilling to sell.  So what happens next?

The developer will make reasonable efforts to acquire the property voluntarily, but if unsuccessful, ultimately, the decision will be up to the local government agency on how to proceed.  The law provides that the agency can either assist with acquiring the land for the off-site improvements, or waive the condition of approval.  (See Gov. Code, sec. 66462.5.)  Where the off-site improvements are necessary to satisfy safety standards, it is unlikely the condition will be waived.  Therefore the local agency generally condemns the necessary property.  The agency typically has 120 days after the approval of the final map to acquire the property by negotiation or commence eminent domain proceedings.

While this process may seem unfair, essentially giving a developer the extraordinary power of eminent domain for a private project, the concept is that a local government agency cannot limit approval of a project on a condition that is completely outside the developer’s control.  And while developers should be hesitant to resort to requiring the local agency to use eminent domain, this process provides a powerful negotiating tool.

Once the process is complete and the agency acquires the necessary property, the developer will then typically complete the improvements, and reimburse the agency for acquiring the off-site property interests (including the agency’s attorneys’ fees).  This is generally negotiated on the front-end through some sort of reimbursement or development agreement.

Even with the elimination of redevelopment in California, we will likely be seeing more and more eminent domain to support public infrastructure supporting private development projects as the real market continues to improve.

A Legal Morass: Overlapping Takings Law With the Endangered Species Act

Posted in Uncategorized

Last week, Jeremy Jacobs posted an interesting article about the U.S. Supreme Court’s recent decision in Horne v. Dep’t of AgricultureNo. 14-275 (U.S. Jun. 22, 2015), and its potential application to Endangered Species Act (ESA) jurisprudence.  (See Raisin ruling seen as lifeline for endangered species, published by Greenwire on August 19, 2015).  In Horne, the U.S. Supreme Court held, in an 8-1 decision, that the forced appropriation of a portion of a farmer’s raisin crop qualified as a “clear physical taking” requiring compensation under the Fifth Amendment to the U.S. Constitution.  Writing the decision for the majority, Chief Justice Roberts distinguished the raisin farmer’s situation from the oyster farmer’s situation addressed in Leonard & Leonard v. Earle, 279 U.S. 392 (1929), explaining that unlike the raisins at issue in Horne, the oysters at issue in Leonard belonged to the state, and therefore requiring the oyster farmer to turn over a percentage of the shucked shells did not result in a taking of private property requiring compensation under the Fifth Amendment.  Mr. Jacobs’ article focuses on this aspect of Horne, and asks whether Chief Justice Roberts breathed new life into a potential takings defense for ESA determinations and regulations.  Specifically, did Chief Justice Roberts’ decision resuscitate the concept of public ownership of wild animals?  If it did, at least one individual quoted in the article opines that the concept could be used to justify regulating activities on private property (e.g., prohibiting construction that directly impacts a listed species), or limiting use of a related resource (e.g., regulating the flow of water for the benefit of ESA protected fish species), all without running afoul of the Fifth Amendment.  Notably, however, the majority of those quoted in the article caution that Chief Justice Roberts’ statement should not be read to apply beyond its limited facts.  While I personally find the latter position to be the more compelling of the two, I also anticipate that the Government will be raising the defense in the not too distant future.

Federal Highway Funds to Continue Flowing — Until October 2015

Posted in Projects

Despite efforts by Congress to finally approve a long-term highway bill that would have secured funding for key infrastructure projects for the next several years, last week Congress managed only to kick the issue down the road a few more months.  It approved a three-month extension of the existing bill, meaning federal highway funds will continue through October 29.  But come October, funds will once again be at risk of drying up if Congress does not enact another bill.Infrastructure-Growing-Gridlock-Solutions

Not surprisingly, neither party is particularly thrilled with the three-month extension, and for good reason.  As explained by Lisa Mascaro in a July 30 Los Angeles Times article, Congress approves stopgap bill to keep highway projects going, “The $8-billion bill will keep federal projects on track for the next three months, but the temporary nature of the fix creates a new crisis point in fall, as Congress has been unable to agree on a long-term solution.”

The Senate had approved a six-year bill last Thursday, but the House rejected it, forcing the three-month stopgap bill.  While he quickly signed the bill to avoid a Friday shut-down of funds, President Obama criticized Congress’ failure to enact a long-term bill.  As quoted in an article for TheHill.com, Obama scolds Congress at highway bill signing:

“We can’t keep on funding transportation by the seat of our pants,” Obama told reporters in the Oval Office. “That’s just not how the greatest country [in the world] does business. I guarantee you that’s not how China, Germany and other countries around the world handle their infrastructure.”

And in case one wonders whether it’s simply a matter of time before the House signs on to the Senate’s six-year bill, think again.  According to a July 29 article by Jake Sherman and Burgess Everett in Politico, Congress faces fall from hell,

Speaker John Boehner, addressing a roomful of fellow House Republicans on Tuesday morning, described a major, six-year highway bill crafted by the Senate as a “piece of shit,” according to sources in the room. Senate Republicans have been only slightly more charitable about the House’s three-month measure, calling it another lame procrastination on an issue that needs to be dealt with now.

I guess we’ll all have to wait to see what happens this fall; at the very least, I’m sure it will be entertaining.

Should California Eliminate USPAP as its Sole Standard of Valuation Practice for Real Estate Appraisers?

Posted in New Legislation, Valuation

Six weeks ago, I wrote about California Assembly Bill 624 and the Appraisal Institute’s effort to change California law that presently requires all licensed appraisers to comply with the Uniform Standards of Professional Appraisal Practice (USPAP).  While the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) would still mandate that USPAP be followed for federally-related transactions (i.e. appraisals for a financial institution that is federally insured), I observed that a licensed appraiser in California performing an appraisal for a non-federally-related transaction would be free to choose any nationally or internationally recognized standard of valuation.  As a real estate lawyer who works frequently with appraisers in legal disputes over real property valuation, it seemed odd to me that California would move away from a single standard and permit a multiplicity of standards.  As I noted then, it isn’t difficult to envision a parade of horribles that might result should appraisers be permitted to identify obscure international standards for an appraisal assignment in order to drive value up or down for a litigant.

To my surprise, my blog post generated a lot of attention in the appraisal world.  I received dozens of phone calls and e-mails seeking to discuss my views on AB 624.  More surprising was the general lack of awareness of the Appraisal Institute’s effort to change California law—even among its own appraiser members.  Indeed, AB 624 had already been approved by the California Assembly by the time I learned about it.  Quite a few appraisers—including MAIs—thanked me for bringing it to their attention and agreed with my views on it.  Naturally, there were others who disagreed.

Ultimately, I was asked by the Appraisal Institute to co-present on AB 624 at its Annual Summer Conference.  It was a very well-attended event with over 250 appraisers in the audience.  My co-presenter was the Manager for State & Industry Affairs with the Appraisal Institute.  He traveled to California from Washington D.C. to educate the audience on AB 624 and its purpose.  It was my sense that I would be wearing the black hat for this program and that I was walking into the proverbial lion’s den.  But it seemed like fun so I agreed to do it.  After my co-presenter finished talking about AB 624 and its purpose, I stood up and shared my views.  In particular, I noted the following points:

  • AB 624 has been amended since my original blog post and now requires that the alternative national or international standards be approved by California’s Bureau of Real Estate Appraisers. I believe this added layer of regulatory oversight is a good thing, but this means the Bureau could theoretically approve a litany of other standards without guidance on when they should be used. To me, this would result in a similar problem of permitting appraisers to select from available standards to achieve a desired outcome for a litigant. In addition,  opposing appraisal experts could easily use different valuation standards. It’s difficult enough for a jury to figure out value without having to analyze what may be tantamount to an apples-to-oranges comparison between two appraisals. Finally, I question whether the Bureau has the resources to evaluate the appropriateness of alternative standards, and who will pay for the added administrative burden on the Bureau?
  • There are a number of arguments in support of AB 624 that are stated within the report to the California Senate committee considering the bill. Notably, all of the arguments in support of the bill were provided by the Appraisal Institute itself. In a nutshell, the arguments in support state that USPAP imposes a level of work that is unnecessary in some cases that causes consumers to hire non-licensed appraisers to value their property. Thus, licensed appraisers are losing business. In addition, USPAP causes licensed appraisers to lose business from international lenders who require compliance with international standards. The one example provided by my co-presenter involved Volkswagen seeking a valuation under German standards.  Rather than hire a licensed appraiser, Volkswagen elected to fly a German appraiser to the U.S. to do the appraisal.  This example admittedly would impact a minuscule percentage of appraisal assignments in California.  Thus, I question whether it would be more appropriate to use a scalpel to address the claimed ills caused by USPAP instead of the ax represented by AB 624. Even the most well-intentioned goals often have unintended and undesirable consequences.
  • AB 624’s opponents’ views are set forth in the same report to the California Senate committee considering the bill. These views came from the American Society of Appraisers, the Royal Institute of Chartered Surveyors, and the Appraisal Foundation. Examples of their views include: USPAP already provides a range of service options depending on a client’s needs and the nature of the assignment; USPAP affords malleability through a jurisdictional exception; multiple sets of standards could cause confusion; the public interest calls for the valuation profession to provide its expertise in a cohesive manner, rather than a fragmented manner; and the rationale for AB 624 lacks substance and opens the door for the creation of legal standards that have no public input. Interestingly, the Appraisal Foundation stated that out of a survey of 175 state regulators from over 30 states, not one thought it was a good idea to enforce multiple sets of appraisal standards.
  • I discussed some of the comments I received in response to my blog post. For example, one MAI appraiser suggested to me that AB 624 still mandates compliance with USPAP’s ethical, record keeping, competency, and scope of work rules, and that they provide the enforcement tools the Bureau needs to protect the public from unethical or incompetent appraisers in the same manner they do under USPAP. In response, I reviewed USPAP’s ethical, record keeping, competency, and scope of work rules and observed that they are very broad and general. Regardless, under AB 624, there would likely be nothing unethical for an appraiser to rely on other standards even if they would generate a higher or lower value for a litigant. More importantly, I identified a number of USPAP provisions that would cease to apply. In particular, Standards Rule 1-2(f) (requiring an appraiser to identify extraordinary assumptions); Standards Rule 1-2(g) (requiring an appraiser to identify hypothetical conditions); Standards Rule 1-3 (requiring an appraiser to identify and analyze the effect on use and value of existing land use regulations and probable modification of them); and Standard 2-2(x) (requiring an appraiser to summarize the support and rationale for a highest-and-best use opinion). All of these rules are crucial for understanding an appraisal opinion and their omission could cause massive differences in value. In other words, there could be serious mischief with litigation appraisals.

Ultimately, I concluded my presentation to the Appraisal Institute by sharing my view that USPAP works very well for litigation appraisals and there was no reason to permit a multiplicity of alternative standards.  While some appraisers may believe that USPAP causes them to lose business, there should be a more discrete way to address specific concerns.  After I concluded my remarks, I was prepared to dodge the food that I assumed the audience would hurl at me.  I jest.  But the audience did have many questions.  One audience member asked why California couldn’t simply harmonize conflicting standards and operate under a single standard instead of permitting many different standards.  Another audience member asked who was paying for AB 624.  My co-presenter responded “you are”.  Once again, the lack of information seemingly shared with the Appraisal Institute’s membership is surprising.  Another audience member explained that she taught USPAP and that many of the concerns with USPAP derive from a lack of understanding of it.  One audience member informed me after the program that the elimination of USPAP Standards Rules 1-2(f), 1-2(g), 1-3, and 2-2(x) were precisely the concerns he would have in the litigation arena.  Finally, one audience member informed me after the program that he was embarrassed that the Appraisal Institute was promoting AB 624.  Nobody in the audience openly supported the bill.

A few days after my presentation to the Appraisal Institute, I had a telephone conversation with an appraiser who supports AB 624. After discussing my concerns surrounding the removal of the above USPAP standards, he suggested to me that USPAP won’t stop appraisers from behaving unethically or incompetently. By that logic, there is no point in applying USPAP to federally-related transactions. As one of the lead trial lawyers who represented the Federal Deposit Insurance Corporation in a U.S. District Court action against four former bank executives of the recently failed IndyMac Bank, F.S.B., I can unequivocally reject that notion. The case involved unsafe and unsound banking tied to inappropriate approvals of huge developer loans. One loan transaction in particular involved a $40 million loan that had an appraisal with a flawed extraordinary assumption tied to assessments from a to-be-created community facilities district (CFD). The appraiser assumed these assessments would not burden the project being developed. But the loan’s primary source of repayment was proceeds from a CFD. Thus, the IndyMac executives approved a loan with insufficient collateral in violation of loan-to-value limitations. If Standards Rule 1-2(f) didn’t require the appraiser to identify his assumptions, there would have been no way for the bank executives to identify the error. That the executives negligently approved the loan despite the obvious error in this instance enabled the FDIC to more easily establish a case against them. And most responsible bank executives would undoubtedly catch the error and restructure the loan to better safeguard our federally insured deposits. It is precisely these types of USPAP protections that we should preserve in California. And the notion that USPAP doesn’t stop an appraiser from being unethical certainly doesn’t mean that we should put a gun in a criminal’s hand by dismantling USPAP’s applicability in non-federally-related transactions.

AB 624 remains pending before the California Senate.  Having now had more time to consider AB 624, the information available on it, and following an open forum where it was discussed among hundreds of appraisers who are members of the Appraisal Institute, I remain convinced that it is too broad, could significantly and negatively impact litigation appraisals and, thus, is a bad idea for California.  Hopefully, our elected officials will agree.

Expanding Your View of Takings Law

Posted in Court Decisions, Inverse Condemnation & Regulatory Takings

As an eminent domain attorney, when I think about a “takings” claim, I always think about a claim involving someone’s real property.  Has the government trespassed onto private property, has it imposed regulations that deny the owner an economically viable use of the property, etc.?  But every once in a while, we get a reminder that “takings” do not always involve real property.  Rather, any private “property” may be taken.

Thus, we get cases like last month’s U.S. Supreme Court decision in Horne v. Dept. of Agriculture.  There, the government sought to force raisin growers to turn over a portion of the year’s crop to the government under the provisions of a 1937 (think, depression-era) program intended — at least on its face — to artificially reduce the number of raisins flooding the market in good years, thereby boosting the price of the raisins that remained on the market.  The Hornes claimed that this program resulting in a taking under the Fifth Amendment.Raisins

In the Ninth Circuit, the Court of Appeal had held that takings claims involving personal property are subject to a higher threshold than takings claims involving real property.  In other words, the Court concluded that the Takings Clause protected real property more than other property.

The Supreme Court, in a 8-1 decision (with Justice Sotomayor as the lone dissent) held that the Takings Clause protects all property rights equally, and that the growers’ raisins were thus entitled to the same protection as grandma’s house.  As Justice Roberts’ explained:

Nothing in the text or history of the Takings Clause, or our precedents, suggests that the rule [regarding what constitutes a taking] is any different when it comes to appropriation of personal property. The Government has a categorical duty to pay just compensation when it takes your car, just as when it takes your home.

Having reached that conclusion, the Court had no difficulty concluding that the forced appropriation of a portion of the raisin crop qualified as “a clear physical taking.”  The Court was more divided on how to assess the amount of “just compensation” to be awarded, but I’ll leave that part of the discussion for another day (mostly since I find it less interesting than the holding on the taking itself).

If you want to read more about the opinion, there has been plenty written about it.  Here are a few articles I thought contained interesting discussions:

  • Ilya Somin, Property owners prevail in raisin takings case, which appeared as a June 22 Washington Post article.
  • Iain Murray, Raisins Takings Case Goes Back to Magna Carta, which appeared in the National Review. (I like this one because it takes the time to wish the Magna Carta a happy 800th birthday.)
  • Amy Miller, Raisin Farmers defeat Feds at Supreme Court, which appeared in the Legal Insurrection.  (I like this one for the scary picture of the farmer.)
  • And finally, Robert Thomas from inversecondemnation.com gives us Unboxing Video: Horne v. Dep’t of Agriculture, which literally is a play on one of those youtube videos where someone records the process of unboxing some fancy new product.  In this instance, he “unboxes” the opinion, reading through its highlights while at the same time showcasing actual raisins.  (Sure, there’s not as much substance here, but Robert usually provides a pretty thoughtful analysis of these issues; in this instance, he replaces some of that thoughtful analysis with cute, clever video content, which was enough to hook me.)

But turning back to the main point here, which is not really to talk about raisins.  The point is that we should take a moment every once in a while to remember that while a “taking” must indeed involve private property, it need not involve real property.

And if you want to expand your mind just a wee bit more, consider this:  if takings jurisprudence applies to all property equally, couldn’t it apply to intangible property, such as intellectual property (copyrights and the like)?  For an interesting discussion of that concept, read Ian McClure’s piece on the subject, Intellectual Property and Eminent Domain: A plausible combination?

California Supreme Court Holds Inclusionary Zoning Subject to Rational Basis Review

Posted in Court Decisions

2013 was a banner year for developers under the takings clause, as both the U.S. Supreme Court and California Supreme Court issued decisions expanding the developers’ ability to challenge exactions as unconstitutional. In Koontz v. St. Johns River Water Management District, the U.S. Supreme Court held that the “essential nexus” and “rough proportionality” standards that apply to government property exactions also apply to monetary exactions that are tied to a governmental approval. And in Sterling Park v. City of Palo Alto, the California Supreme Court held that when a public agency approval requires a developer to convey units at below market rates or make substantial cash payments to the public agency, such conditions qualify as exactions that may be challenged under the California Mitigation Fee Act. It was on the heels of these decisions that the California Supreme Court granted the petition for review in California Building Industry Association v. City of San Jose, a case that presented a facial challenge to the legitimacy of an inclusionary housing ordinance. And because of this timing and a perceived momentum, many predicted that the California Supreme Court’s decision would be another victory for developers. These predictions turned out to be wrong.

In California Building Industry Association v. City of San Jose, the California Supreme Court held that an inclusionary housing ordinance that required, among other things, all new residential development projects of 20 or more units to sell at least 15 percent of the for-sale units at a price that is affordable to low or moderate income households did not impose an exaction “upon the developers’ property so as to bring into play the unconstitutional conditions doctrine under the takings clause of the federal or state Constitution.” And therefore, because the inclusionary housing ordinance was reasonably related to the city’s interest in promoting the health, safety, and welfare of the community, the challenge to the ordinance failed.

After the ordinance was enacted in 2010, the California Building Industry Association (CBIA) filed a lawsuit alleging that the ordinance was invalid because the city failed to provide substantial evidence demonstrating a reasonable relationship between “any adverse impacts caused by or reasonably attributed to the development of new residential developments of 20 units or more and the new affordable exactions and conditions imposed on residential development by the Ordinance.” In other words, CBIA alleged that the conditions imposed by the inclusionary housing ordinance amounted to an unconstitutional exaction. The California Supreme Court rejected this contention.

In the decision the Court walked the parties through a number of takings cases, including Koontz v. St. Johns River Water Management District and Sterling Park v. City of Palo Alto. The Court distinguished both of these authorities.

With respect to Koontz, the Court stated that there was nothing in the decision to suggest the “essential nexus” and “rough proportionality” standards “apply where the government simply restricts the use of property without demanding the conveyance of some identifiable protected property interest (a dedication of property or the payment of money) as a condition of approval.” And in CBIA v. City of San Jose, the Court found that the inclusionary housing ordinance was simply a use restriction, as it restricted how the developer may use its property by limiting the price of some of the units.

With respect to Sterling Park, the Court stated that the decision “left open the question whether” the California Mitigation Fee Act applied when a developer was not required to convey a property interest to the public agency or pay a fee, and because CBIA had alleged a facial challenge, it would not be addressing that issue now.

After distinguishing these authorities, as well as a handful of others, the Court found that because there was a reasonable relationship between the land use restriction and the public welfare, the facial challenge failed.

While the decision is clearly a momentum killer, the decision does not necessarily foreclose future challenges by developers. As noted above, the Court declined to address whether a Mitigation Fee Act challenge could be asserted, and so that remains an open question.  Additionally, the Court left open the possibility of an as applied constitutional challenge. For example, the decision states that while price controls that deny a property owner a “fair and reasonable return on its property” would be unconstitutional[,]” in this case the ordinance has not yet been applied to any proposed development. Similarly, the concurrence by Justice Chin notes that if an ordinance required a developer to provide subsidized housing, “for example, by requiring it to sell some units below cost, [that] would present an entirely different situation. Such an ordinance would appear to be an exaction and I question whether it could be upheld as simply a form of price control.”

As such, and because there are more than 170 counties and cities in California that have adopted inclusionary housing ordinances, you can expect that more litigation is on the horizon.