Tentative Decision Favors Private Utility Company in Takeover Bid

One of the hot issues in eminent domain these days involves the government’s efforts to take over privately-run utility companies.  The argument typically is that the government — which has no profit-making motive — can run the utility at a lower cost, saving the ratepayers money.   Not surprisingly, the utility companies feel otherwise.

WaterIn California, one of the first cases to reach trial on this issue is about to wrap up.  The City of Claremont sought to condemn the Golden State Water Company’s assets, and Golden State fought the City’s right to take.

In a Court trial (i.e., a trial without a jury), the judge has just issued a tentative decision to side with Golden State, denying the City’s right to take.  According to a November 10 article in the Inland Valley Daily Bulletin, Tentative ruling has Claremont losing bid to takeover water system:

Judge Richard Fruin’s tentative decision finds it is in the public’s best interest for the system to remain as a private investor-owned utility.

This is not necessarily the end of the story.  The City has 15 days to submit comments and, even if the judge maintains his decision, the City has the option to appeal, something which seems likely, as the City’s November 10 press release explains: “Should the final decision be against the City, the City Manager will forward a recommendation to the City Council to begin the appeal process.”

We will keep you posted.

What Does the Election Mean for the Future of Infrastructure Development?

With only a few days remaining until one of the most controversial presidential elections in history, there has been little focus on the candidates’ plans as it pertains to the future of infrastructure development in America.  But both Hillary Clinton and Donald Trump have big spending plans — they are just vastly different in their proposals on how funds will be raised and spent.  If you’re interested in a detailed breakdown of Clinton’s and Trump’s infrastructure plans, there is an excellent article by Chuck Devore in Forbes titled “Where Clinton and Trump Stand on Transportation“.

According to the article, infrastructure experts predict that America needs $500 billion of new infrastructure spending per year — about 3 percent of the national economy and a little more than double the current rate of spending.  Where would that money come from, and how would it be spent?  Here’s a brief re-cap of the article discussing where Clinton and Trump stand, along with Devore’s take on potential issues or concerns:

CLINTON PROPOSAL

  • $500 billion in added infrastructure spending over a 5 year period.
  • Funding primarily coming from a hike in taxes on businesses, along with a revolving fund government infrastructure bank to underwrite projects.
  • Broad spending on areas outside transportation, including school construction and environmental spending.  (Devore’s article uses California as a cautionary tale, with the state’s borrowing tens of billions of dollars to build transportation and water infrastructure, but instead significant money is spent on endless studies, environmental remediation, and park land acquisition.)
  • Spending along the lines of the status quo, with politicians picking projects, often based on political considerations, rather than where the dollars can most be efficiently spent.

TRUMP PROPOSAL

  • $1 trillion in added infrastructure spending over a 10 year period.
  • Funding does not come from raised taxes, but instead by adjusting the tax code to incentivize private investment in public projects with an 82% tax credit on equity invested in infrastructure, combined with federally-subsidized loans.
  • Spending focused on creation of more roads, bridges and water projects — projects that can create a revenue stream from users in order to incentivize private investments in public projects.  (Devore’s article suggests the need for eminent domain reform in this instance to ensure private property owners have greater assurance of being treated fairly by powerful public-private partnerships that can condemn their land for public transportation projects.)
  • Relies on investors, not politicians, to make decisions about what to build, and with private “skin in the game,” a lower likelihood of costly, underused projects.

While infrastructure development continues to be a huge issue in America, and Clinton and Trump’s proposed plans differ significantly, transportation spending will likely remain out of the main stream media given the more dramatic issues surrounding each candidate.  Happy voting America!

New Opinion Clarifies Takings Law Regarding Affordable Housing Programs

Last year, my partner Ben Rubin reported on the California Supreme Court’s decision in California Building Industry Association v. City of San Jose, which analyzed an inclusionary housing ordinance and held that such ordinances do not qualify as “exactions” and, consequently, are reviewed under a deferential standard that looked at whether the ordinance was “reasonably related” to the city’s interest in promoting the health, safety, and welfare of the community.

Last month, we saw the first published decision following last year’s Supreme Court pronouncement.  In in 616 Croft Ave., LLC v. City of West Hollywoodthe Court of Appeal looked at another affordable housing ordinance.  There, the court again held that the ordinance did not qualify as an “exaction” and therefore was not subject to scrutiny under the typical NollanDolan analysis, which examines whether (1) a “nexus” exists between the exaction and the impact a proposed development will have on public infrastructure, and (2) whether the extend of the exaction is “roughly proportional” to the impact the proposed development will have.

In Croft, as in the City of San Jose case last year, the Court felt no need to delve into Nollan/Dolan jurisprudence, because an affordable housing ordinance is not an “exaction.”  How can this be, when in Croft, the owner was forced to pay an affordable housing in lieu fee (i.e., a fee paid in lieu of actually reserving a certain portion of the units being built as affordable housing) of more than $500,000 in order to build 11 condominiums?  Sounds a lot like an exaction.

But the housing in lieu fee differs from an exaction in one crucial respect.  Exactions are, by their very nature, fees imposed to offset the impact a proposed development will have on the community.  Affordable housing programs are entirely different.  The city in Croft, for example, is not claiming that the owner’s 11 condominiums will generate $500,000 worth of affordable housing needs.  Instead, the affordable housing program is designed to combat a state-wide concern that has little to do with the specific development the owner planned for its property.   As the Court explained:

the purpose of the in-lieu housing fee here is not to defray the cost of increased demand on public services resulting from Croft’s specific development project, but rather to combat the overall lack of affordable housing.

Thus, because the fee is not an “exaction,” it is not analyzed under the Nollan/Dolan rubric.

There’s more to the decision and to the owner’s challenges, but the end result of all of it was that the court upheld the imposition of the in lieu fee.

From a larger perspective, the case raises issues that remain in flux around the country, and as one commentator convincingly argues, makes these issues ripe for additional U.S. Supreme Court guidance. For more on that angle, read Bryan Wenter‘s post,  Court Rejects Takings Challenge to City’s Imposition of $600,000 in Fees for 11-Unit Infill Project | Land Use Developments.

Municipal Condemnation of Privately Held Utilities Continues to be a Hot Issue, but at what Cost?

In January, I spoke at a conference in Austin about efforts by municipalities to condemn privately-held utility companies.  At the time, I figured it would be a one-off presentation on a pretty niche issue, even for eminent domain attorneys.  But next month, I’ll be speaking on a variation of that topic at CLE International’s 2016 Eminent Domain Conference in Las Vegas, a presentation that will be the third time this year I’ve spoken on the topic.

In fact, we’ve been following this issue since at least 2014, when my partner Brad Kuhn wrote about a takeover effort involving PG&E.  Those efforts remain ongoing, and in June, the South San Joaquin Irrigation District (“SSJID”) adopted a Resolution of Necessity to condemn PG&E’s facilities in Ripon, Escalon, and Manteca.  SSJID filed an eminent domain action on July 7.

Without passing any judgment on PG&E or SSJID in the above case (I have no personal knowledge about the case and am not involved in it in any way), it does provide a framework for what I think may be the most important aspect of these types of cases: valuation.

SSJID’s premise in condemning PG&E’s facilities is that it will be able to save its constituents 15 percent on their utility bills.  I have no idea whether that is or is not the case, but I do know that the actual savings in these situations can be complicated and very difficult to predict.  Hopefully, before a municipality proceeds down this path, it will have performed a realistic financial assessment that takes into account both (1) what the municipality thinks it will cost to provide utility service and (2) what it will cost to acquire the private utility company’s assets.  This second piece is crucially important, because the residents are not likely to be very impressed with a reduction in their utility bills if they have bonds to pay off from the acquisition that dwarf the utility service “savings.”

This is where I think many takeover efforts will collapse, as municipalities run their calculations, demonstrate a net “savings,” and then find out during the acquisition process that the cost is far higher than they had projected.  As just one recent example, the City of Missoula, Montana condemned the utility company in its jurisdiction based on a projected acquisition cost of $50 million and anticipated legal fees of $400,000.  Ultimately, the condemnation award was $38 million higher than projected — and the legal fees may turn out to be as much as $14,000,000.

Lmountain-water-companyike the SSJID case, I have no personal involvement or knowledge about the situation in Missoula.  But I do know that a takeover effort projected to cost $50,400,000 may not “pencil out” quite the same if the actual cost turns out to be more than twice that much.  At least one person following the situation there appears quite concerned about how everything is turning out.  Dan Brooks, in his August 4 blog post Two years and $14 million later, Missoula wins right to buy Mountain Water, expressed his frustration at the city’s process and (apparent) lack of financial planning:

The city had not run the numbers to determine at what point Mountain Water stopped being a good deal. Fifty million was a good price, apparently, and $50 billion would be too much. But within that range, no one could say exactly where a smart investment would turn dumb.

So what’s my point in all of this?  Only this:  whether you are a city representative considering whether a takeover bid makes sense or a resident encouraging your local government to take steps down this path, you need to think carefully about the costs of proceeding.  As well intentioned and as meticulous as your financial planning may be, it is a good bet that the takeover target is going to view the costs very differently, and that the actual acquisition costs may be higher . . . potentially far higher . . . than anything that makes sense in terms of saving anyone any actual money.

USPAP to Remain the Sole Standard of Valuation Practice in California for Real Estate Appraisers

Last summer, I wrote about the Appraisal Institute’s controversial effort to promote legislation in California (known as AB 624) that would enable licensed real estate appraisers performing appraisals for non-federally-related transactions to use any nationally or internationally recognized standard of valuation. I commented at the time that it wasn’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.”

Not surprisingly, there was widespread criticism of AB 624 from other appraisal organizations including: The American Society of Appraisers, the Royal Institute of Chartered Surveyors, and the Appraisal Foundation. Indeed, at the time AB 624 was being considered, a survey of 175 state regulators from over 30 states revealed that not one thought it was a good idea to enforce multiple sets of appraisal standards.

This morning, I learned from the Appraisal Foundation that AB 624 died in committee. The deadline for action on AB 624 was Friday, August 19, and it was not brought forth. AB 624 had already been approved by the State Assembly, so this outcome was far from certain last summer. At a time when the political process is forefront on the minds of many Americans, it’s nice to know that in the case of AB 624, popular and, frankly, reasonable sentiment prevailed.

Is Redevelopment Quietly About to Grow in California?

redevelopmentRedevelopment has quite the lengthy history in California.  Yet it has generally been “All Quiet on the Western Front” since redevelopment agencies were abolished in 2011 as part of Governor Brown’s plan to fix the state’s budget deficit.  Yes, the legislature breathed new life back into redevelopment last year through Community Revitalization and Investment Authorities (CRIAs), but a widespread return seemed unlikely given the safeguards and restrictions put in place — particularly as to what can constitute “blight” (a term which previously could be interpreted so broadly to include nearly anything).  Yet as many predicted, that may have just been the first baby-step to gain approval and re-introduce the broader use of redevelopment in California.

So what’s the current scoop?  Check out Assembly Bill 2492, which is currently circulating in the Legislature.  The bill’s purpose is purportedly to address “unanswered questions about the data sources” that can be used to determine “blight.”  But by tweaking the blight definition, could the bill open the door to the return of widespread use of redevelopment?

There’s a fascinating article by Debra Saunders in the San Francisco Gate, Eminent domain means your home can be their castle, which walks through the history of redevelopment in Oakland — starting back when Governor Brown was mayor.  The history gives some context to where we’re at now, with AB2492 knocking on the doorstep of approval.  Ms. Saunders summarizes the bill as seeking “to expand redevelopment in the worst way.”  She concludes that, in effect, AB2492 “would allow officials to find that an area is blighted if, for example, the median income there is less than 80 percent of the median income either ‘statewide, countywide, or citywide.'”  As explained by Marko Mlikotin of the California Alliance to Protect Private Property Rights, the bill would allow local officials to “cherry-pick the data” and let affluent communities parade as needy.

In other words, if AB2492 is approved, Ms. Saunders concludes that local jurisdictions can pick the statistics that best suit their needs in order to find ways to use redevelopment.  For example, the most wealthy city in California could declare a portion of the city blighted and therefore subject to redevelopment if that portion does not meet 80-percent of the median income of the rest of the city — even if that portion of the city is otherwise more affluent than the rest of the county or state.  Perhaps it allows blight to once again become subjective.

We’ll continue to follow AB2492, and will report on whether it is ultimately approved.

How to Negotiate a Right of Entry After Property Reserve

Last month, the California Supreme Court’s decision in Property Reserve v. Superior Court provided long-awaited certainty for public agencies after a court of appeal determined the often-used “right of entry” statutes failed to provide adequate Constitutional protection for pre-acquisition investigations and testing.  In summary, the Supreme Court held the right of entry process constitutional, with one reform:  the property owner is entitled to a jury trial on the amount of compensation.  For a full analysis, see our e-alert here.

The decision preserves a significant tool for public agencies to keep their projects on schedule and comply with the environmental laws that govern their approval. The government cannot acquire property for its project until it has received environmental clearance.  But to receive environmental clearance the agency must investigate project impacts.  And to investigate projects impact, the agency must enter property.  That is simple enough where the owner agrees, but often property owners are reluctant to have the government enter their property, especially to do invasive testing and inspections.

Now that Property Reserve has spotlighted the right-of-entry procedures, agencies may find themselves facing owners who are more knowledgeable about the process, and in particular the ability to force the agency to the time and expense of a jury trial on compensation.  If nothing else, Property Reserve may give owners leverage to negotiate with agencies over terms and, of course, money.  Negotiating a right-of-entry agreement will be even more important.

Pre-planning for rights of entry will go a long way and it is crucial to have a written document that provides certainty. And even if voluntary, rights of entry should comply with statutory requirements.  For example, advance notice is required in California and should be included in a right of entry agreement.  Advanced notice protects both parties involved by giving the agency and the owner certainty of when the right of entry will take place.

A right of entry agreement should also contain specific and certain parameters for the scope of work. At a minimum, the agreement should set out the purpose of the entry, whether entry is needed to conduct visual inspections, photographic documentation, and /or environmental testing.  Agencies should try to be as specific as possible, without overly restricting the ability to get the information they need.  Remember, compensation for the entry may be determined by a jury.  The broader the scope of work, the more compensation may be owed to the property owner.

Other details to include are:

  • Who may enter the property?
  • What is the time and place of the entry?
  • How many entries are allowed?
  • Where is the access point?
  • Must the agency restore the premises after the right of entry?
  • How much compensation is owed?
  • Indemnity and / or insurance provisions?

After Property Reserve, a property owner may seek a jury determination of the amount of compensation.  It is in the best interest of the agency (and potentially the property owner) to finalize the amount of compensation in a right of entry agreement to avoid having to argue compensation before a jury trial.

Judge Should Consider Constitutionality of a Dedication Requirement, Not the Jury

Every year or so, a new appellate court decision comes out addressing the proper role of the judge versus the jury on some certain eminent domain issue. Most recently, a trial court, appellate court and the California Supreme Court all grappled with this question:  Does the judge determine whether a dedication requirement is constitutional, or does the jury?  Yesterday, the Supreme Court issued its decision in City of Perris v. Stamper, No. S213468 (Aug. 15, 2016) holding that it is the role of the judge to determine whether a dedication requirement is constitutional.  The Court also answered a second question, whether the project effect rule (or project influence rule) applies to dedication requirements.  The Court held that, while it depends on the timing and circumstances, a dedication requirement can be a project effect to be considered when determining just compensation.  Below is a short summary of the ruling and a longer, more detailed discussion will follow in our upcoming e-alert.

Background

The property owned by the Stampers was vacant land zoned to allow light industrial development. In 2005, the City of Perris amended its general plan and revised circulation elements in the plan to allow for certain truck routes.  Then in 2009, City sought to acquire a strip of the Stamper property for a street realignment project to accommodate one of the truck routes, bisecting the property.  The City valued the vacant property sought as undevelopable agricultural land because it would not have approved any development of the property unless the Stampers dedicated the property needed for the street realignment to the City, and the property should be valued on that basis.  The Stampers argued that dedication requirement should not be considered in determining compensation because it was not reasonably probably the City would impose the requirement, and even if it did, it would be unconstitutional.

The trial court held that it was reasonably likely that the dedication requirement would have been imposed, and that the dedication requirement would have been constitutional. Though the Stampers argued that both issues should have been determined by a jury, because they directly relate to compensation, the conclusions were reached by the judge.  The Stampers also argued that the dedication requirement was a “project impact” and thus should not have been taken into account in valuing the property.  The Court of Appeal reversed, holding that the jury should have considered the dedication requirement issues but disagreed with the Stampers by holding that the dedication requirement was not a project impact because it existed independent of any specific project.

Supreme Court Ruling

The Supreme Court held that it is for the judge to decide whether a dedication requirement is constitutional. The judge must consider whether the dedication requirement has an “essential nexus” to the public purpose for denying any application to develop the property, as set forth in Nollan v. Cal. Coastal Comm. (1987) 483 U.S. 825, and whether the dedication requirement is “roughly proportional” to the impact of the proposed development, as set forth in Dolan v. City of Tigard (1994) 512 U.S. 374.  The Court found that these inquiries are mixed questions of law and fact, but are predominantly legal issues that must be determined before considering whether the dedication would have been imposed, and the judge should make the decision.

The Court also held that the Porterville doctrine, whereby the partial acquisition of vacant property that would have been subject to a lawful dedication requirement should be valued as undeveloped rather than highest and best use, is not applicable in “situations where it was probable at the time the dedication requirement was put into place that the property designated for public use was to be included in the project to which the property is being condemned.”  The Court further held that a dedication requirement can be a project effect and the applicability of the project effect rule is to be determined by the judge because it is a preliminary question of fact.

The case was remanded to the trial court to analyze whether the acquisition of the property was probable when the dedication requirement was put into place and whether the dedication requirement is constitutional.

Conclusion

At the end of the day, it appears both the City and the Stampers won. But of the issues addressed by the Court, it seems the more important ruling is the one regarding project effect, and the Court’s establishing new law on when a dedication requirement should and should not be taken into account when determining just compensation.  However, I think its application will be messy and complicated (and expensive) because a public agency may have to present evidence on the timing of imposing dedication requirements, the decision-making that went into the imposition and essentially prove that the purpose of the dedication is not to avoid paying just compensation.  I anticipate this will cause more than a few headaches.

Most interestingly, though the Court stated it was not asked to determine whether the dedication requirement was constitutional, both the majority opinion and the dissenting opinion seemed to imply that requiring a property owner to dedicate 20% of its property right through the middle of the parcel would not pass muster.   The trial court is left to make that decision, and presumably, the hint will be taken.

 

New Alternative for Widening 55 Freeway Reduces Right-of-Way Impacts

For years, we’ve been working with our public agency clients during the environmental and design-phase to minimize right-of-way impacts with new infrastructure projects.  Yet for many agencies, property acquisitions are an afterthought, as the costs of construction and environmental impacts headline agencies’ concerns.  That thought process is slowly beginning to change, as agencies are starting to recognize that right-of-way acquisition can significantly delay projects, resulting in construction delay claims, change orders, loss of project funding, and in extreme cases, prevent the project from being built.  Moreover, acquiring private property is a sensitive subject and is one many Board members would prefer to avoid if possible.

As an example of this paradigm shift, an article from the Orange County Register, New alternative for widening 55 freeway reduces right-of-way impact, demonstrates the new focus on minimizing property acquisitions and the benefits such planning can provide.  The article reports that OCTA has decided to move forward with a new build option for the 55 freeway widening which would minimize property acquisitions by reducing the standard shoulder and lane widths.  OCTA board member Lisa Bartlett called the new alternative “genius” for creating additional traffic flow without taking away too much right-of-way:

I really think this is a much better project. We get one shot in this corridor to make improvements for greater throughput.  Construction on the project will be done in one time, not in multiple years in multiple projects.”

While other alternatives exist and are still being evaluated, we should be encouraged that agencies such as OCTA are looking more closely at right of way impacts along with the other major project issues they face during the environmental review and design phases.   Indeed, looking for alternatives to minimize property acquisitions could lead to significant savings and also assist in keeping projects on schedule.  While not all such efforts will lead to any actual decrease in right of way impacts — environmental concerns and construction costs will also continue to be drivers in the design process — we nonetheless hope that in the future, more agencies will focus additional attention on right of way impacts early in the planning process.

The Olympics’ Secret Use of Eminent Domain

Olympic SymbolIt’s an exciting time with the Olympics taking place in Rio De Janeiro.  But what takes place before the Olympics ever gets off the ground involves years of planning, lobbying, and infrastructure development.  That development often requires use of eminent domain.  And in countries without due process and constitutional rights to just compensation, the condemnation process is an ugly endeavor for those impacted.

In Rio, for example, KUSA reports in its article, Rio de Janeiro villages uprooted for Olympics, that leading up to the games, eminent domain was often used “without warning and usually without any compensation.”  In one village, owners spray painted a sign that reads “not all of us have a price.”  The owners say they don’t blame the Olympics, but instead their own government; twenty of the families have hired a lawyer to fight the Olympic take-over.  The government has responded by stating that the Olympic games and infrastructure are for the greater good, as it will benefit Brazil’s economy in the long-run.

The story in Rio is not new; the same thing happened on Sochi, Russia, where families who had modest cottages along the beaches of the Black Sea were forced out for the Olympic park.  That park was a ghost town three weeks after the closing ceremony.

Perhaps the worst example was in Beijing, where 1.5 million residents were displaced by eminent domain, and one individual burned himself to death after being forcibly evicted from his home to make way for the 2008 Olympic Games.  The Geneva-based Centre on Housing Rights and Evictions said residents were often forced from their homes with little notice and little compensation.  “In Beijing, and in China more generally, the process of demolition and eviction is characterized by arbitrariness and lack of due process,” the group said in a report.

Yet not all Olympic locations have seen such unfortunate measures.  In London, the story was different, as the Olympic committee took an industrial area that was a Superfund site and cleaned it up, then built it up.  It is now apartments and shops.  I’ve also traveled many times to Whistler, the home of the 2010 winter Olympics, and I’ve witnessed the thriving community which was helped by the incredible infrastructure improvements to the area.

So while we enjoy watching the Olympics, keep in mind the individuals who have lost their property, and be thankful for the constitutional protections that exist in the United States when it comes to eminent domain.

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