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California Eminent Domain Report

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

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.

Join Nossaman at the IRWA Annual Education Conference in San Diego

Posted in Events

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!

Is the Current National Appraisal Regulatory System Being Challenged?

Posted in New Legislation

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…

A Public Agency’s Contingent Final Offer Of Compensation Is Not Reasonable

Posted in Court Decisions

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.

When It Comes to Property Acquisitions and Private Development, Timing May Be Everything

Posted in Court Decisions, Projects

iStock_000015731716_FullAs 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.

Redevelopment By Any Other Name Would Still Be Redevelopment…

Posted in New Legislation, Redevelopment

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.]

What is “Just Compensation” for Gas Station Acquisitions?

Posted in Valuation

Car-Wash-Franchises-OpportunitiesGas stations and car washes are primarily owner-occupied convenience businesses, typically located near freeway off-ramps and at the intersections of well-traveled roadways.  As a result, they’re frequently involved in eminent domain acquisitions for freeway expansions or road widenings.  A common question is how should such properties and businesses be valued to satisfy California’s requirement of “just compensation”?

A recent article by Retail Petroleum Consultants, Condemnation: Appraising Gas Stations and Car Washes, How to Ensure Just Compensation for Business and Goodwill, provides some interesting insights.  According to the article, it is typical — but probably inaccurate — for eminent domain attorneys, public agencies, and gas station owners to retain two appraisers, one for the real estate and one for the business goodwill.  Retail Petroleum Consultants explains that this dual appraisal methodology does not arrive at the correct value for a number of reasons, including:

  • gas stations and car washes are sold based on their cash flow potential, not physical units of comparison, such as a price per square foot that you would typically see with a commercial property;
  • buyers of gas stations do not separately purchase business goodwill, fixtures and equipment, and real property — they pay an agreed price for the entire going-concern based on the business’ potential cash flow; and
  • there is little available data in the marketplace about recent, arm’s-length rental rates and capitalization rates for gas stations and car wash properties.

These are all valid points, but what is the solution?  Retail Petroleum Consultants suggests that gas stations and car washes are “special use properties,” and parties should retain an appraiser that has access to confidential proprietary market data, including sales volumes, profit and loss statements, expense ratios, fuel margins, car counts, operations by brand, car wash type, and cost comparables and going-concern sale comparables.  Again, unlike typical commercial properties, they suggest there is little, if any, relationship between the number of dispensers or building size and how much cash flow a gas station generates.  Market participants instead value such owner-occupied properties based on cash flow, focusing on gross profit multiples and capitalization rates to convert income to value.

If you’re interested in learning more about gas station or car wash valuations, check out Retail Petroleum Consultants’ article.  Something for all of us involved in the right of way industry to consider.

Looming Right of Way Certification Deadline Threatens Butte County Project

Posted in Projects

Looming Right of Way Certification Deadline Threatens Butte County Project

Right of Way Certification is a key project milestone; not only does it mean a project is ready for advertising but obtaining certification by a certain date is often a prerequisite for funding.  Tying certification to dollars means it’s crucial that agencies acquire property and/or obtain orders for possession in a timely manner.  As we’ve discussed here before, this can mean filing an eminent domain action while still negotiating with property owners, something many agency boards are reluctant to do.

The latest example of the perils of prejudgment possession comes out of Butte County.  Ryan Olson of the Chico-Enterprise Record reports in his article “Butte County Supervisors to Consider Eminent Domain for Oroville Sidewalk Project” that three properties remain to be acquired for the Lincoln Boulevard Pedestrian Safety Project.  According to Olson, the County needs to acquire the right of way or obtain orders of possession for all of the required parcels by August 30, 2015.  The County Board of Supervisors is scheduled to consider Resolutions of Necessity at its meeting this week.  Once the resolutions pass, the County may file eminent domain actions.  But this is cutting it fairly close.  Under Code of Civil Procedure section 1255.410, an agency must give an owner of occupied property at least 60-days notice before bringing a motion for prejudgment possession.  And the order is usually not effective for another 30 days after the hearing.  So, assuming a best case scenario – the County is able to serve the motion for possession immediately after filing the complaint and is able to get a court hearing 60 days later – the effective date of possession is probably early-to-mid- August.  That doesn’t give the County a lot of time to serve its papers or deal with any objections or potential right-to-take challenges before the August 30 deadline.

Filing an eminent domain action can seem like a drastic step to both agency boards and property owners.  But the reality is that with funding and tight project schedules, it is often necessary to take action sooner than later.  This does not have to derail negotiations.  Letting owners know how the process works, and offering them alternatives (such as a possession and use agreement) can often keep negotiations on track for everyone.

California Court Explains the Interrelationship Between the Resolution of Necessity and Project in the Manner Proposed in an Eminent Domain Action

Posted in Court Decisions

One of the issues often disputed between public agencies and property owners in eminent domain actions is the assessment of severance damages, and in particular, whether damages should be based upon (i) the terms of the resolution of necessity, or (ii) construction of the project in the manner proposed.  This dispute grows from a seeming conflict between a court of appeal decision, County of San Diego v. Bressi (1986) 184 Cal.App.3d 112, and Code of Civil Procedure section 1263.420.  Specifically:

  • Bressi held that in a condemnation action, (1) the jury must determine damages caused by the construction of the project, and in doing so, it must consider the most injurious use of the property reasonably possible, taking into consideration the entire range of uses permitted under the resolution of necessity, and (2) that the condemning agency may not introduce any evidence that “contradicts” the resolution.
  • Section 1263.420 provides that severance damages include damages caused by “construction and use of the project for which the property is taken in the manner proposed by the [agency] . . . .”

Property owners routinely rely upon Bressi to argue that the most injurious use permitted under the resolution of necessity must be considered for purposes of assessing damages.  Public agencies counter by relying on section 1263.420 to argue that damages should be based upon the construction of the project in the manner proposed – not some hypothetical project or use that has never been considered.

It is practically impossible for public agencies to narrowly tailor their resolutions of necessity to specifically spell out in detail how every aspect of the project will be constructed.  Thus, appraisers often base their opinions on wildly different assumptions about the “project,” leading to a wide disparity in appraisal opinions.

A recent Court of Appeal opinion, Sacramento Area Flood Control Agency v. Dhaliwal (April 21, 2015) provides some guidance as to how these issues should interplay.  In Dhaliwal, the property owner filed a motion in limine to exclude any evidence of possible access to the property by a particular road on the grounds that such evidence contradicts the resolution of necessity and would require future permits.  The agency countered that there was no contradiction, and it was entitled to introduce post-project plans to provide access to the property.  The court allowed all evidence to go to the jury.

On appeal, the Court explained that the jury is entitled to consider any factor affecting market value so long as it is not speculative and does not contradict the scope of the taking defined by the resolution of necessity.  The Court held that it was proper for the jury to hear evidence regarding the owner’s potentially obtaining post-project access, as it was not speculative and did not contradict the resolution.  The Court clarified that Bressi

stands for the unremarkable proposition that the condemning agency may not introduce evidence pertaining to a proposed, intended, or future use which contradicts the scope of the taking as set forth in the resolution of necessity.

In Dhaliwal, while the agency’s resolution did not specify that the owner reserved certain access rights, the resolution also did not prohibit the owner from securing such rights in the future, meaning there was no conflict.  The Court held that absent a contradiction, the agency’s failure to “carve out an exception” or provide the owner with access rights is of no consequence.

The Dhaliwal opinion is an important one for public agencies.  It supports the proposition that an agency need not spell out every precise detail of the project, and that as long as the project in the manner proposed does not conflict with the resolution of necessity, it is appropriate to introduce such evidence to the jury.  Until a published, citable, decision exists on this point, however, the tension between Bressi and section 1263.420 will likely continue to manifest itself in wildly divergent appraisal opinions.

[UPDATE:  The Dhaliwal opinion was recently ordered published by the Court of Appeal, so it can now be relied upon as precedent.]

Court Clarifies Rules for Recovery of Attorneys’ Fees in Eminent Domain Actions

Posted in Court Decisions

200572855-001In California eminent domain actions, absent special circumstances (such as an abandonment, successful right to take challenge, or inverse condemnation finding), a property or business owner is typically only entitled to recover litigation expenses (attorneys’ fees and expert costs) in one circumstance:  where the public agency’s final offer of compensation is unreasonable and the property owner’s final demand is reasonable.  In making this determination, the judge is only to consider the final offer and demand that were made at least 20 days before trial.  (See Code Civ. Proc., sec. 1250.410.)

But the law has been somewhat unclear on how this rule works where a trial date is continued, or where there are separate trials on (i) whether certain items of damages are allowed and (ii) the ultimate jury trial on the amount of compensation.  This week, in People ex rel.  Dept. of Transportation v. Hansen’s Truck Stop (April 24, 2015), the California Court of Appeal addressed these questions and provided guidance for public agencies and property owners in making their final offers and demands.

The Court set forth the following rules for final offers and demands when dealing with trial continuances and bifurcated trials:

  • Trial Continuances:  when the trial date is continued, the judge is to consider the final offer and demand made at least 20 days before the date trial actually commences — regardless of whether offers and demands were timely filed in connection with previously scheduled trial dates.
  • Bifurcated Trials:  where there is a separate trial on issues relating to compensation (such as entitlement to certain aspects of damages, like access impairment), this early trial does not trigger the obligation to exchange final offers and demands; instead, the operative date for purposes of the final offer and demand is the date trial actually commences on the determination of compensation (i.e., the jury trial).

When reaching these conclusions, the Court was troubled with the statute’s mandate that allows only a single offer and demand to be considered on the issue of reasonableness.  The Court provides an example where a condemning agency could make a pre-litigation offer for “an artificially low sum, insist upon a bifurcated trial on preliminary issues of dubious merit, then avoid paying the property owner’s expenses for that trial by making a section 1250.410 offer that is reasonable prior to the compensation trial.”

While this example could theoretically occur (although it seems somewhat unlikely), the Court’s ruling also potentially causes a different problem:  if one party timely exchanges a final offer or demand 20 days before trial, and the other party does not exchange, the non-complying party will do everything possible to seek a trial continuance; the continuance would then reset the date of exchange, allowing the non-complying party to now make an exchange while having the benefit of seeing the other party’s number.  I’ve seen a number of instances where one party fails to timely exchange a final offer or demand, and to me, this circumstance seems more likely than the Court’s concern about a public agency making an unreasonable initial pre-litigation offer, then proceeding all the way through a bifurcated trial on a dubious legal issue, and then only after losing making a reasonable offer before the valuation trial.

The bottom line is that the best practice is to agree in advance with opposing counsel on how and when the final offer and demand will be exchanged.  If you have questions about this process or how it works, let us know.  And be on the lookout for a more detailed discussion of the case through an e-alert that will be following shortly.