California Eminent Domain Report : a blog following condemnation, inverse condemnation, and regulatory takings written by attorneys with Nossaman LLP.

The opening skirmish in the next phase of the battle between cities and the state over control of property taxes played out in Sacramento Superior court yesterday afternoon.  At issue was property taxes formerly controlled by redevelopment agencies.  While the court ruled against the petitioning cities, as with every other aspect of the California’s budget battles, it is difficult to say that there were any real winners.    

In City of Palmdale, et al. v. Ana Matosantos, Palmdale and eleven other cities sued the Department of Finances and various county auditor-controllers contending that the state has been too stingy in approving enforceable obligations of the former redevelopment agencies.  The first disbursement from the Redevelopment Property Tax Trust Funds is scheduled to occur tomorrow and the petitioning cities argued that money for the disputed obligations should be held back.  They also argued that the June 1 disbursement should include extra money to the cities to make up tax revenue they should have received earlier in the year.

As it turns out, the cities were asking for a greater share of tax revenue that simply does not exist.  This has to be as disappointing for the cash strapped state as it is for cash strapped cities.                      

To put all of this into context, it is important to look back at why redevelopment was abolished in the first place.  Its end came not because of any philosophical objections by the Governor or Legislature.  Rather, in the face of an anticipated $25.4 billion budget deficit, property tax increment controlled by redevelopment agencies proved to be an irresistibly tempting source of funds for the state.  The expectation was that ending redevelopment would free up property tax revenue which could be used to narrow the state’s budget deficit.  Unfortunately, as with everything having to do with the state’s budget, things haven’t worked out exactly as planned. 

The unwinding of redevelopment agencies and the payment of their debts involves the establishment of Redevelopment Property Tax Trust Funds into which the former tax increment for each project area is deposited.  Successor agencies are charged with preparing Recognized Obligation Payment Schedule (“ROPS”) delineating enforceable obligations payable by the successor agency.  An oversight board, comprised of appointees from various local agencies within the redevelopment project areas, decides which of the items qualify as enforceable obligations to be submitted to the Department of Finance for approval.  Those obligations deemed to be enforceable will be disbursed, twice annually, by the county auditor-controller from the Trust Funds.  Any residual balance will then be distributed to school districts and other local agencies.   

According to press accounts, the state Department of Finance has questioned hundreds of millions of dollars in purported enforceable obligations.  Fearing that money needed to pay those contested amounts would be disbursed to school districts and other local entities, the city of Palmdale and 11 other cities banned together to file.  At yesterday’s hearing they asked the Court to issue an order preventing property tax revenues from being paid on Friday to school districts and other local entities, and that this money must be held in trust until after their disputes with the state are resolved. 

But here is the rub.  In most instances, after paying undisputed ROPS items there will be no money left over to sequester.  In fact, for a majority of these petitioning cities, there will not be enough property tax revenue to pay all of the undisputed ROPS items. 

The petition was denied and the June 1 disbursement to successor agencies will occur as planed.

Despite the state having prevailed in court, there are no real winners.  The shortfall in property tax revenue to pay existing enforceable obligations comes as a major blow to cities charged with winding up their former redevelopment agencies.  It also comes as a blow to the state, which had planned on surplus funds being available to offset its funding obligations for school districts.

In the short run, it seems that little has changed.  There is still insufficient tax revenue to pay all of the obligations of the state and local entities.  New legal challenges are being filed almost daily and the battle for control of those revenues rages on.
 

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By now, loyal followers of this blog are well versed in the whys and wherefores of redevelopment's demise.  You know all about the 30+ year struggle between the state and cities over allocation of property tax revenues.  The impact on the State's budget caused by Proposition 98, the creation of ERAFs and Propositions 1A and 22 in the new millennium are by now old hat.  You can recount by heart the story of the rise and fall of the alternative voluntary redevelopment program that was ABx1 27 and the Supreme Court’s decision in California Redevelopment Assn v. Matosantos.

But what does all of this mean for the assets, obligations, and liabilities of the former redevelopment agencies?  How do cities go winding down their redevelopment agencies and disposing of their assets?  When the Legislature adopted ABx1 26, it no doubt anticipated that most cities would elect to participate in the alternative voluntary redevelopment program.  Undoubtedly, a few would be unable or unwilling to make the required payments and would therefore wind down their agencies as mandated by ABx1 26.  What the Legislature never anticipated was that all 400 or so agencies would be dissolved simultaneously.  As a result, ABx1 26 paid scant attention to the details of dissolution.

The Legislature is now grappling with the unintended consequences of ending a 60 year program at the stroke of a pen.  What, for example, did they mean when they instructed cities to dispose of the assets of their former redevelopment agencies "expeditiously and in a manner aimed at maximizing value”?  Are successor agencies supposed to “expeditiously” sell the properties at fire sale prices or should they develop long-term asset management plans to dispose of them in a more orderly, but less expeditious, fashion?  What of cities that elect to retain the housing assets and functions previously performed by their redevelopment agencies?  ABx1 26 passes on the obligations and liabilities for low to moderate income housing programs without clearly identifying funding sources.

These and other issues are addressed in various bills now pending before the State Legislature. 

If you are interested in learning more about pending cleanup legislation, how the winding up process is actually playing out, or if you would like a refresher on the whys and wherefores of redevelopment’s demise, I will be speaking at the IRWA chapter 42 lunch in San Jose next Wednesday,  For more information or to register for the lunch, please go to the Chapter 42 page.

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How is an eminent domain appraisal different from other forms of appraisals?  What is the difference between a deposit appraisal and an exchange appraisal and why do condemners usually hire separate appraisers for each?  If I am an appraiser, how do I develop a practice as an expert witness?

These and other questions will be answered in a panel discussion at the Northern California Chapter of the Appraisal Institute's "2012 Annual Spring Conference" to be held at the Doubletree Hotel, in Modesto, CA., on March 19, 2012.  I, along with Norm Hulberg of Hulberg & Associates and Larry Castellanos of Associated Right of Way Services, will be speaking on the topic of "Appraisals for Eminent Domain."

Register for the conference online at the NorCal Chapter of the Appraisal Institute's website.

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Are you interested in learning more about the impacts of the dissolution of redevelopment agencies in California? Will you be in the Walnut Creek area on Thursday? If so, please sign up to attend a candid panel discussion with influential local politicians who can articulate what aftershocks can be expected by the recent decision to eradicate Redevelopment Agencies. I will be providing a legal perspective on why this all came about and what it means for cities and counties whose redevelopment agencies were abolished.

The event is sponsored by the East Bay chapter of Commercial Real Estate Women. A Link to the March 15th event can be found here.

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Although best known today as the voice of bumbling Mayor West on Comedy Central’s Family Guy, Adam West’s real claim to fame was playing the caped crusader in the 1960s television series Batman.  Batman and the Boy Wonder regularly matched wits with the Riddler, a villain who would deliver clues to his elaborate criminal plans by deceptively simple riddles.  A recent unpublished decision, City of Southgate v. Jauregui (Court of Appeals of California, 2nd District, Division 4, No. B228334) both poses and solves a deceptively simple riddle, worthy of the Riddler himself. 

Riddle me this: When is a property owner not an owner for purposes of receiving a condemnation award?

In City of Southgate Salvador and Norma Jauregui owned a property that was condemned by the City of Southgate for a street improvement project.  The Jaureguis were the fee owners as of the effective date of the order for prejudgment possession.  After the City took possession and began construction of the project, Golden Security Bank, the holder of a first deed of trust, foreclosed and took title in its own name.  The Jaureguis and the Bank then each claimed the right to receive the just compensation awarded for the taking of the property by the city.

The Jaureguis had a compelling argument. After all, under California law, when a condemning agency obtains an order of immediate possession and then takes possession of the subject proerty, the “taking” is deemed to occurred at that time.  (Redevelopment Agency v. Gilmore (1985) 38 Cal.3d 790, 800)  Accordingly, “the party who owned the property at that time is entitled to the condemnation award.”  In Re Rossi (Bankr. 9th Cir (1988) 86 B.R. 220, 224) the foregoing authority notwithstanding, both the trial court and court of appeal concluded that the Bank, not the Jaureguis, was entitled to receive the condemnation award.

The Jaureguis position was undermined by the small matter of a bankruptcy filing by Norma Jauregui. She filed for bankruptcy before the effective date of the order for prejudgment possession.  As a result, control of the condemned property was transferred to the trustee of the bankruptcy estate.  He concluded that, because the outstanding loan obligations exceeded the value of the property, the automatic stay should be lifted and the Bank allowed to proceed with the foreclosure sale.  The Bank then entered into a compromise agreement with the City whereby the Bank agreed to make a full credit bid of $1.53 million to purchase the property at the foreclosure sale, and then transfer the property to the City for $1.53 million.  Salvador Jauregui objected to the compromise agreement in the bankruptcy court, but his objections were rejected.  The bankruptcy court lifted the automatic stay allowing the Bank to foreclose on the property and convey it to the City at the agreed price. 

While the Jaureguis technically retained fee title as of the effective date of the order for prejudgment possession, the property itself  had become an asset of the bankruptcy estate.  Having failed to convince the bankruptcy court that allowing the bank to foreclose and then convey the property to the City for a stipulated amount, the Jaureguis could not get a second bite at the apple by making the same argument in the state court eminent domain action.

Holy res judicata Batman!

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And now, for a slightly different perspective.  What impact will the demise of redevelopment agencies and the sale of their assets have on on California's real estate recovery?  Who are the winners and who are the losers from the California Supreme Court's decision in California Redevelopment Assn. v. Matosantos?  I will be joining an esteemed set of panelists to discuss these questions and more at an Appraisal Institute workshop on January 19, 2012.  The panel will include myself, Sean Charpentier, Redevelopment Coordinator for the City of East Palo Alto, Debbie Kern of Keyser Marston Associates, and June Catalano, City Manger of the City of Pleasant Hill.   
 
The workshop will be held at the Crow Canyon County Club, 711 Silver Lake Drive in Danville from 4:00 to 6:00 p.m.  While geared toward those in the appraisal community, you don't have to be an appraiser to attend.  The workshop is open to anyone with an interest in the far reaching implications of the death of redevelopment in California.

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The Supreme Court heard oral arguments yesterday in California Redevelopment Assn. v. Matosantos, the action filed by the California Redevelopment Association, League of California Cities and others challenging the constitutionality of ABX1 26 and ABX1 27.  Based upon their questions it appeared that the Justices were satisfied that ABX1 26, the bill abolishing redevelopment agencies, passes constitutional muster.  However, ABX1 27, the bill allowing for their reinstatement by the making of  “voluntary” payments, seemed to be on much shakier grounds.  The question then becomes:  are the two so inexorably intertwined that they must stand or fall together, or is 27 severable from 26?  The future of redevelopment in California may depend on how the Justices answer this question.  

A. What the Legislature Creates, the Legislature Can Abolish

Based on their questions, the Justices seemed convinced that, on a stand alone basis, AB1x 26 would be constitutional.  Redevelopment agencies are, after all, creatures of statute.  The Legislature which created redevelopment agencies has the power to abolish them.

Counsel for the Petitioners conceded this issue, but argued that the vice of 26 is not that it dissolves redevelopment agencies per se, but that it dissolves them and transfers their tax increments to schools and special districts in violation of Proposition 22.  The Legislature cannot use a constitutional means to achieve an unconstitutional end.  Of course, this argument hinges upon the contention that the Legislature enacted 26 in an effort to coerce cites and counties with redevelopment agencies to participate in 27’s “Voluntary Alternative Redevelopment Program,” which Petitioners claim is not at all voluntary.

The real test then becomes whether ABZX1 27 is or is not constitutional and, if it is unconstitutional, is it severable from ABX1 26? 

B. Is the “Voluntary Alternative Redevelopment Program” Truly Voluntary?

The Justices tested the Petitioners’ contention that reestablishment payments made by cities and counties under 27 would inevitably come from local tax revenue, in violation of Proposition 22.  As many of our readers will recall, Proposition 22 amended the California Constitution to prohibit the State from redirecting revenue from locally imposed taxes to pay for the State’s obligations.  Attorneys for Petitioners, Respondents and the Intervener, County of Santa Clara, all seemed to agree that payments under ABX1 27 would most likely come from local tax revenues. 

Counsel for the State argued that this was not prohibited by Proposition 22 because it merely prohibits the Legislature from making a law “requiring” tax increments to be diverted to state obligations.  ABX1 27 was drafted to avoid this prohibition by creating a “Voluntary Alternative Redevelopment Program” in which cities or counties may elect to participate.  Many of the Justices seemed skeptical of this argument.  More than once the term “ransom payment” was used to characterize the payments required by 27.

The Justices probed further as to what sources sponsoring agencies might have to make the ABX1 27 payments that would not otherwise be prohibited.  There seemed to be a consensus that if the payments made under 27 were deemed to be involuntary, they would indeed run afoul of Proposition 22. 

C. The Severability Clause in ABX1 27 

At various points the question was posed:  what happens to 26 if we decide that 27 is unconstitutional?  Counsel for the CRA and League of Cites argued that since 26 was enacted solely to compel cities to make the payments under 27, the two bills are not functionally severable.  He added that to uphold 26 and strike down 27 would be the worst of all possible outcomes for his clients.  Counsel for the State took a more nuanced approach, but ultimately acknowledged that his clients would be satisfied with such a result.  Counsel for the County of Santa Clara hammered hard on the theme that 26 should be allowed to stand while 27 should be struck down.  He argued that for too long redevelopment agencies have siphoned off money desperately needed by counties to meet their financial obligations. 

In the end, it may all come down to Section 5 of Chapter 5 of ABX1 27 which says, in essence, that if any provisions of 27 are held invalid, the provisions of ABX1 26 shall continue in effect.  Counsel for Petitioners argued that this clause is not conclusive.  He asserted that the Court must be able to conclude the Legislature would have passed 26 even if 27 had failed.  The legislative history of these two bills, he argued, shows that it was never the intent of the Legislature that redevelopment be abolished with no means for its reestablishment.  

Did the Legislature utilize a constitutional means in the adoption of ABX1 26 to achieve an unconstitutional end? Is ABX1 27 truly a “voluntary” program so as to not run afoul of Proposition 22?  Can the Court find that 26 and 27 are so joined at the hip as to not be functionally severable, despite the severability clause in 27?  These are the questions that the Justices are now weighing and which will be answered in their decision, which is expected to be handed down before January 15, 2012.

Stay tuned….

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Last Friday I spoke at the CLE Eminent Domain Conference in San Francisco.  The topic of my talk was "The Death And Possible Rebirth of Redevelopment in California."  I spoke on the current state of limbo in which redevelopment agencies find themselves as a result of the passage of ABX1 26 and ABX1 27 and the ensuing lawsuit challenging their constitutionality.  While I mentioned that the California Supreme Court would be hearing arguments on November 10th, I neglected to mention how to access the webcast of the proceedings.  For those interested in watching the arguments, direct your browser at 9:00 a.m. on Thursday, November 10, 2011 to the California Channel at www.calchannel.com. 
 
Back in August, the Court agreed to hear the case on an expedited basis, so as to reach a decision before Jan. 15, 2012, when the first payments under AB1x 27 would be due.  The positions staked out by the two sides were neatly summarized in statements given this morning on Sacramento's Capital Public Radio by H.D. Palmer of the Governor's Department of Finance and Chris McKenzie of the League of California Cities.

Palmer: "We believe the law is clear, that these agencies were created by an act of the legislature, and similarly, they can be dissolved by an act of the legislature."

McKenzie: "It's an abuse of their power - you can't violate the constitution and claim, oh, but we really are just using this other power that we have."

We expect to see these conflicting arguments probed and challenged by the Supreme Court Justices on Thursday.  Check back here later in the week for our take on the arguments and how they were received.

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On Thursday we reported the California Supreme Court’s decision to assert jurisdiction over the writ petition challenging the constitutionality of AB 26 X1 and AB 27 X1.  The Court also issued a partial stay of AB 26 X1 and a complete stay of AB 27 X1.  While the Court’s actions were designed to preserve the status quo until it renders a final decision in January, the status quo can mean very different things to different agencies.

For those that could not afford the payments necessary to re-establish themselves, the Court’s action is nothing short of a stay of execution.  But for those that planned on making the payments and continuing on with business as usual, the stay is an unwelcome barrier to new projects.  

To get a handle on what this all means, we need to first take stock of where things stood before the partial stay was issued.  

A. The Death and Rebirth of Redevelopment

In June, the Governor signed two budget trailer bills that substantially reshaped the California Community Redevelopment Law (“Redevelopment Law”):  AB 26 X1 immediately stripped redevelopment agencies of their authority to issue or sell bonds, incur new indebtedness, acquire or dispose of real property, enter into new contracts, etc.  However, until their dissolution, redevelopment agencies retained the power to honor existing contracts and legal obligations, pay existing debts, etc.  Arguably, cooperation and reimbursement agreements between cities or counties and their redevelopment agencies entered into prior to January 1, 2011, also remained in effect until October 1, 2011.  Thus, many agencies have continued to fund ongoing city or county projects as preexisting obligations.  

Unless they opted to participate in the “Alternative Voluntary Redevelopment Program” under AB 27 X1, as of October 1, 2011, all redevelopment agencies were to be dissolved.  Their assets, contracts and obligations were to be transferred to successor agencies.  Most agreements between cities and counties and their redevelopment agencies, including cooperation and reimbursement agreements, were also slated for termination.  

If a city or county elected to participate in the “Voluntary Alternative Redevelopment Program,” it could do so by adopting an ordinance re-establishing its redevelopment agency and committing to annual community remittances to local school and special districts.  For some cities, the amount of these so-called “pay to play” fees were so great as to present an insurmountable barrier to re-establishment of their redevelopment agencies.  Others ran the numbers and determined that the benefits of continued redevelopment activities outweighed the burdens imposed by the pay-to-play fees.      

Not surprisingly, the constitutionality of AB 26 X1 and 27 X1 was immediately challenged.  On July 18, 2011, the California Redevelopment Association, League of California Cities, and the cities of San Jose and Union City filed a petition for writ of mandate and application for stay in the California Supreme Court.

In the meantime, cities and counties throughout the state adopted ordinances reestablishing their redevelopment agencies under the Voluntary Alternative Redevelopment Program, but often with a catch.  In agreeing to make the requisite community remittances, most of the ordinances state that they are being made under protest and without prejudice to recovering such payments if AB 26 X1 and 27 X1 are declared unconstitutional. 

B. Preserving the Status Quo

The partial stay issued last Thursday was designed to preserve the status quo as it existed at that moment in time.  AB 27 X1 was stayed in its entirety, as were the sections of AB 26 X1 which dissolved redevelopment agencies.  However, the section of AB 26 X1 which stripped redevelopment agencies of their power to take on new obligations was not stayed.  

On the one hand, agencies are today in the same position they were a week ago.  They are powerless to initiate new projects or enter into new contracts, but they can continue to function as they have since the two bills were signed by the Governor in June.  For those cities or counties relying on cooperation and reimbursement agreements with their redevelopment agencies to fund ongoing projects, their day of reckoning has been postponed.  So to, those cities unsure of their ability to make the pay-to-play payments by October 1 now have a bit of breathing room.

On the other hand, agencies that can afford the payments and would have reconstituted themselves under AB 27 X1 are arguably not in the same position that they were a week ago.  To the extent they had plans for new projects to be pursued this calendar year, those plans are now on hold, at least until the Court issues its ultimate ruling in January 2012.  Compounding their uncertainty is a fear that the Court may ultimately uphold the constitutionality of AB 26 X1 but strike down 27 X1, thus removing any pathway to survival. 

Finally, the stay throws a bit of a monkey wrench into the Governor’s budget projections.  He was counting on diverting $1.7 billion from redevelopment agencies to balance California’s 2011-12 budget.  While the money may ultimately be diverted, in the short run the budget continues to fall further behind in its revenue projections.
 

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When last we posted on the topic (see Days that Make Being an Eminent Domain Attorney Exciting: More Redevelopment Developments), the bills that would end redevelopment in California as we know it, AB 26x and AB 27x, had been passed by both the Assembly and Senate, but were left hanging when the Governor vetoed the main budget bills.  It was unclear what life, if any, these budget trailer bills had absent a budget.  The Legislature therefore simply held them without forwarding them to the Governor for his signature.  They have remained in a state of procedural and legal limbo for several weeks.  However, yesterday's announcement that the Governor and Democrat leaders had reached a budget deal changes everything.  With a budget deal in place, the Governor is now apparently ready to sign the redevelopment bills. 

Unlike the Governor's original proposal which would have simply killed off redevelopment in one fell swoop, there is now a two step process.  AB 26x would eliminate redevelopment agencies, while AB 27x allows for the reestablishment of redevelopment agencies if they commit to making payments to Special Districts Allocation Funds and a County Educational Revenue Augmentation Funds.  (See New Bills to Eliminate Redevelopment Agencies Unveiled.)  Agencies that lack the funds to make the payments would simply be gone forever.  The proponents of these bills claim that for this fiscal year, the State will receive $1.7 billion from redevelopment agencies. 

Supporters of redevelopment were quick to respond.  "Redevelopment Supporters Vow Lawsuit if Governor Signs 'Smoke and Mirrors' Budget that Includes Unconstitutional Redevelopment Elimination Bills (AB 1x 26/27)" read a press release issued by the Mend it Don't End It Coalition, a group supported by the California Redevelopment Association and the California League of Cities.  Chris McKenzie, executive director, League of California Cities said, “AB 1x 26/27 violate the State constitution.  Voters just passed Proposition 22 overwhelmingly in November to prevent this type of State raid of local funds.  If the Governor signs this legislation, we will file litigation at the earliest opportunity to defend the constitution and the will of the voters.” 

John Shirey, executive director, California Redevelopment Association, said, “Make no mistake about it: AB 1x 26/27 would lead to the elimination of redevelopment agencies throughout California....We plan to file a lawsuit to prevent this legislation from going into effect."
 
Redevelopment has been teetering on the brink for several months now.  Each time that its fate seemed to be sealed, political bickering in Sacramento has been its salvation.  However, this feels different.  The Governor's office has announced a press conference at 3:00 to announce the budget deal.  We will keep you posted.

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