Last week, Jeremy Jacobs posted an interesting article about the U.S. Supreme Court’s recent decision in Horne v. Dep’t of Agriculture, No. 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.
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.
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.
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.
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.
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?
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.
Next week, Nossaman’s eminent domain group will be attending the International Right of Way Association’s Annual Education Conference in San Diego. While we’ve been attending the conference for several years, we’re excited to have it taking place in our own backyard, and we know that our friends and colleagues at Chapter 11 will do an amazing job with it. If you’re going to be there, make sure you take some time to visit with us. There will be plenty of places to find us:
- On Sunday and Monday, we will be hosting a booth in the exhibition hall. In addition to it being a great opportunity to seek out some free legal advice from us, we’ll also be rocking out with a Guitar Hero themed booth. Stop by to play the game and get your name on our leader board for a chance to win the new Guitar Hero Live, coming out later this year. And if you play, you can enter our raffle to win a 65-inch HDTV (it will be the one we’re using for the game). You will find us in Booth 405 & 406.
- On Monday, June 15, from 10:00 to 11:00 a.m., Artin Shaverdian will be hosting a panel on “Design-Build Projects and Right of Way Acquisition: Benefits, Challenges and Pitfalls,” along with Mark Lancaster (from RCTC) and Joey Mendoza (from OPC).
- On Tuesday, June 16, from 1:30 to 3:00 p.m., I will be moderating a panel on “Legal Constraints with Early Right of Entry Requirements” (and if you don’t want to see me, at least come support my co-presenters, Mike Williams and Pat Thayer from HDR).
- Finally, on Wednesday, June 17, from 10:00 to 11:30 a.m., Brad Kuhn will be moderating a panel on “How Early Acquisition Can Minimize Risks and Reduce Costs,” along with Chip Willett (from Bender Rosenthal) and Rob Caringella (from Jones, Roach & Caringella, Inc.)
I hope to see you there!
Two days ago, the Appraisal Foundation issued a memorandum to “Appraisal Regulatory System Stakeholders” that warned of the Appraisal Institute approaching members of Congress to sponsor legislation that would essentially dismantle the current national appraiser regulatory system. The Appraisal Foundation states that provisions “being suggested by the Appraisal Institute include the elimination of the Appraisal Subcommittee and the removal or significant dilution of the Congressional authority of the Appraisal Foundation.” It asserts that removing “the existing federal element of the current appraiser regulatory system would cause a breakdown in the uniformity and consistency in valuation services, at a time when the marketplace is calling for more uniformity, not fragmentation.”
According to the Appraisal Foundation, the Appraisal Institute seeks to dilute the importance of the Uniform Standards of Professional Appraisal Practice (USPAP) to allow for more “competition” among standard setters. The Appraisal Foundation further notes that this is contrary to the global effort underway to promote the convergence of valuation standards. The Appraisal Institute has undertaken similar efforts in California and Texas seeking to require compliance with USPAP only when there is a federally-related transaction.
After reading the Appraisal Foundation’s memorandum, I tracked down California Assembly Bill 624. AB 624 provides that USPAP would constitute the minimum standard of conduct and performance for “federally related” real estate appraisal activity. As for non-federally-related appraisals, a state-licensed appraiser must use a nationally or internationally recognized valuation standard addressing the credibility of an appraisal or an appraisal review.
USPAP has been used in California for the past 25 years. AB 624’s stated purpose is to modernize California’s appraiser licensing law to permit licensed or certified appraisers to apply the most relevant appraisal standards for their assignments. It has been promoted as a means of enabling appraisers to take appraisal assignments in California that involve international standards or don’t require USPAP-compliant appraisals for non-federally related transactions. Speaking from the perspective of a legal advocate, 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. In addition, what does “federally related” mean? In the context of eminent domain, it would very likely include a federal project. But what if it is a County project that has federal funding? To my knowledge, AB 624 has received little attention. It has already been approved by the Assembly and is now being considered by the State Senate. Stay tuned…
In California eminent domain cases, a property or business owner is entitled to recover litigation expenses (attorneys’ fees and expert costs) when the public agency’s final offer of compensation is unreasonable and the property owner’s final demand is reasonable. (See Code Civ. Proc., § 1250.410.) But what happens when the government agency’s offer is subject to approval of a federal agency, the City Council, or the Board of Supervisors? Is this a “reasonable” offer under Section 1250.410? This week, the California Court of Appeal in City and County of San Francisco v. PCF Acquisitionco, LLC (May 26, 2015), confirmed that such contingent final offers cannot be deemed reasonable, thereby potentially exposing the public agency to paying the owner’s litigation expenses.
The City sought to acquire property for a subway station. The valuation opinions ranged from $3.8 million to $10.875 million. Shortly before trial, the parties exchanged statutory offers and demands. The City’s final offer of $5.5 million was made contingent on approval from the Federal Transit Administration (FTA), along with the Board of Directors and Board of Supervisors. The property owner’s final demand was for $8.6 million. No settlement was reached, and the jury determined the amount of just compensation for the property to be over $7 million. The owner moved to recover its litigation expenses under section 1250.410.
The trial court denied the motion and found that the City’s offer was reasonable. The court reasoned that the City was not “unyielding” in making its offer; it considered PCF’s statement of valuation, the risks of trial, and made an offer that exceeded its own appraisal by 60%.
On appeal, the Court focused on whether section 1250.410 is satisfied if the agency’s final offer is contingent upon the approval of other agencies. The Court found that the Legislature did not intend for a condemnee to:
[C]hoose between entering into an uncertain and contingent bargain or risk losing any chance of recovering its litigation expenses if it proceeds to trial.
As a result, the Court held that the agency’s final offer was unreasonable for purposes of section 1250.410, and remanded the case to the trial court to determine the amount of litigation expenses to be awarded (assuming the owner’s final offer was reasonable).
In light of this decision, it is important for government agencies to plan ahead and ensure that all necessary approvals are made prior to making a final pre-trial settlement offer pursuant to section 1250.410; otherwise, a contingent offer may be found unreasonable. Given the short period of time between the parties’ exchange of appraisals and the date upon which final settlement offers are exchanged, this timing becomes increasingly difficult where federal funding is involved and FTA or Federal Highway Administration approval is necessary, or where Boards or City Councils do not meet frequently.
Be on the lookout for a more detailed discussion of the case through an e-alert that will be following shortly.
As the old adage goes, the three most important things to consider with real estate are location, location, and location. But any developer who has lived through a real estate cycle, and any public agency that is under a funding deadline or working through a project’s environmental approvals, knows that timing may be even more important than location. Indeed, timing considerations often create competing interests between public agencies and developers. On the one hand, before commencing right of way acquisition, public agencies are required to comply with complicated environmental processes that may take years to complete. On the other hand, during this environmental approval process for a public project, a property owner’s plans for development face uncertainty if the planned public project may alter or limit the scope of potential uses of the property. If a developer decides to forge ahead with its project despite a planned public project, it could easily result in a far greater cost for the public agency to acquire the necessary right of way. The timing risk associated with two planned projects that conflict is precisely the situation the California Court of Appeal addressed in Jefferson Street Ventures, LLC v. City of Indio (April 21, 2015 [ordered published May 15, 2015]), Case No. G049899. Click here to learn more about the issues and takeaways from this case.
It appears the state assembly is trying to get California back on the redevelopment wagon…again. (For a brief history lesson on redevelopment, see below.) Assembly Bill 2 (AB2), which passed the assembly earlier this month, would create new entities called Community Revitalization Investment Authorities that would have the same legal authority as redevelopment agencies, i.e., the power to issue bonds, provide low-income housing, prepare and adopt a plan for an area, and among others, acquire property using the power of eminent domain. The legislature explains that the dissolution of redevelopment has left local government entities without any tools for financing affordable housing, community development and economic development projects. The bill would allow government entities to “invest in disadvantaged communities with a high crime rate, high unemployment, and deteriorated and inadequate infrastructure, commercial, and residential buildings.”
While the similarities to the prior redevelopment law are not surprising, there are a couple of distinct differences worth noting. First, any area the new “authority” plans to invest in would “be required to have an annual median household income that is less than 80% of the statewide annual median income” which was not the case under the prior redevelopment law. Back then, RDAs were only “required to conduct a study and make a finding that blight existed in a project area before they could use their extraordinary powers, like eminent domain, to eradicate blight.” In addition, once an authority meets the 80% requirement, it must also meet three of four other requirements related to requisite employment rates, crime rates and deterioration of infrastructure as well.
Second, like the RDAs, the new authorities would freeze the property taxes of the area at the time the plan is approved and then collect the tax increment to use on specific activities. But AB2 would require that the taxing entities in the plan area, like cities, counties and special districts, agree to divert tax increment to the authority. Local government entities can also opt-out of participation if they change their minds but will have to first repay all debts incurred to that point.
A further limitation provides that a government entity must have completed the wind-down process of its RDA and receive a finding of completion from the Department of Finance that the former RDA is fully dissolved before it proceeds with forming an authority.
If this is starting to sound familiar, then you’ve been paying attention. The Legislature passed a very similar bill, AB2280, last year, which the Governor vetoed because the bill vested the program in redevelopment law by cross-referencing the Community Redevelopment Law (CRL). Instead, AB2 incorporates portions of the CRL into it rather than cross-referencing the CRL. The bill is currently in the Senate and as of last week, was referred out to a Senate committee for recommendation. We will keep you informed on the status of this bill.
[A brief history lesson on redevelopment: Redevelopment began in 1945 to assist local governments with eliminating blight through development, reconstruction and rehabilitation (Community Redevelopment Law). 1951 brought us the mechanism redevelopment agencies used to subsidize redevelopment efforts with local property taxes. In 1976, redevelopment was tied to the housing supply when the legislature required that at least 20% of the tax increment revenue from redevelopment project areas be used to increase, improve, and preserve the supply of housing for very low to moderate income households. And in 1993, the legislature sought to restrict redevelopment activities and limit them to predominantly urban areas.
Then, in 2011, as part of the Governor’s budget plan, the legislature approved the dissolution of the state’s 400+ RDAs, which went into effect in 2012, and RDAs have been stuck in wind-down purgatory since then. In late 2014, the Governor gave new life to tax increment financing by expanding infrastructure financing districts, a move some mislabeled as a step toward “bringing back” redevelopment.]