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In Lieu Affordable Housing Fee Was Not Reasonably Justified Based On Existing Law


04/21/09

In a significant new decision, the California Court of Appeal held that an increase in the City's in lieu affordable housing fee from $734 to $20,946 was not "reasonably justified." (Building Industry Association of Central California v. City of Patterson (2009) 171 Cal.App.4th 886.) While the case concerns the interpretation of a specific provision in a statutory development agreement, the case is noteworthy because the Court concluded that the fee increase violated established statutory and constitutional legal requirements.

The Court's Opinion

The City and the developer entered into a statutory development agreement. The agreement provided that the developer would pay an in lieu affordable housing fee of no less than $734 per residential dwelling unit, and that the developer would be subject to revisions to the fee that were "reasonably justified." After the execution of the agreement, the City increased the affordable housing fee to $20,946 per single-family residential dwelling unit. The City based the fee increase on a study that calculated the amount of revenue needed to bridge the "affordability gap" between the cost of a new market-rate unit and the cost of units affordable to very low, low, and moderate income households.

The developer challenged the increase in the fee on the grounds, among others, that the increased in lieu affordable housing fees violated statutory and constitutional requirements that impact fees bear a "reasonable relationship" to the "deleterious public impact of the development." In interpreting the "reasonably justified" provision of the development agreement, the Court of Appeal concluded that an objectively reasonable person would expect that phrase to mean that an increase in the in lieu affordable housing fee would conform to existing law and would not violate established legal principles. The Court then analyzed the takings caselaw applicable to impact fees and concluded that the increase in the affordable housing fee could not be "reasonably justified" as required by the development agreement "unless there is a reasonable relationship between the amount of the fee, as increased, and ‘the deleterious public impact of the development.'" (Id. at pp. 898-899 [quoting San Remo Hotel v. City and County of San Francisco (2002) 27 Cal.4th 643, 671].) Applying this test, the Court found that neither the City's fee study nor anything else in the record indicated that the increased fee met the reasonable relationship requirement.

What it Means

Provisions concerning increases in affordable housing fees and other impact fees in statutory development agreements may be subject to statutory and constitutional requirements – even where a development agreement does not expressly incorporate such requirements. Affordable housing fee increases may also be vulnerable to direct challenge under the "reasonable relationship" test. But because the court did not reach the argument that the fee increase also violated the Mitigation Fee Act, the applicability of the Mitigation Fee Act to in lieu affordable housing fees remains unresolved.

Looking Ahead

The continuing vitality of the decision is uncertain. The League of California Cities has petitioned the California Supreme Court to depublish the opinion, which would rob it of any precedential value in other challenges to in-lieu affordable housing fee increases. In addition, the City of Patterson has petitioned for review in the California Supreme Court. In the meantime, the City of Patterson case provides important new precedent that may be used to test the validity of certain in lieu affordable housing fee requirements.

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