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Mitigation Fees May Balloon After California Appeals Court Decision

By: John J. Flynn III
06/12/08

A recent California Court of Appeal decision affirmed a large mitigation fee imposed by the Coastal Commission on a homeowners association. The fee was calculated by using a method that included the recreational value, rather than a more conventional real property valuation method, raising concerns for developers and private property owners.

On May 23, 2008, the California Court of Appeal held that the Coastal Commission's imposition of a mitigation fee for offsite mitigation was not an unconstitutional taking and allowed for wide discretion in calculating mitigation fees. In Ocean Harbor House Homeowners Assoc. v. California Coastal Commission, 2008 Cal. App. LEXIS 770 (May 23, 2008), the plaintiff, Ocean Harbor House Homeowners Association, applied for a coastal development permit from the California Coastal Commission to build a seawall. The building of the seawall would result in the loss of approximately one acre of beach. Because there was no feasible way to mitigate the loss of beach at the site, the Coastal Commission staff report recommended an in-lieu mitigation fee be used to buy beach property in a different part of the bay for public recreational use. Plaintiff challenged the fee by petition for a writ of administrative mandate.

Plaintiff homeowners claimed that the fee was an unconstitutional taking because there was no nexus or rough proportionality between the fee and the impact of the seawall. The Court of Appeal affirmed the trial court's determination that the mitigation fee was constitutional. In rendering its decision, the court turned to the two seminal cases on takings: Nollan v. California Coastal Commission, 483 U.S. 825 (1987) and Dolan v. City of Tigard, 512 U.S. 374 (1994). In Nollan, the Supreme Court held that there must be a nexus between the required mitigation and the alleged impact. In Dolan, the Supreme Court held that, in addition to having a nexus, the mitigation must be roughly proportional to the impacts resulting from the proposed project.

The plaintiff asserted that the only on-site impacts of the proposed seawall were the loss of beach and continuous lateral access and a decrease in sand supply. The court, however, found that there was an additional and distinct impact – the loss of recreational use, which was properly the subject of separate mitigation. According to the court, the nexus between the mitigation fee and the loss of recreational use was direct and specific: "a fee to purchase beach for public recreation has a logical tendency to mitigate loss of recreational use on the beach at the complex."

The most important part of the court's decision relates to the methods of evaluating the proportionality of the mitigation fee to the impact. The Coastal Commission's staff report discussed three methods to determine the value of the acre of beach that would be lost, thereby determining the amount of the mitigation fee:

(1) sand replacement method – base the fee on the cost of buying enough sand to cover an acre of beach (approximately between $1 million and $1.2 million);

(2) real estate value method – base the fee on the price of a comparable acre of beachfront property (estimated to be $1 million); and

(3) economic recreational value method – base the fee on the recreational value of the acre of beach (estimated to be $5.3 million over 50 years, or a present value lump sum of $2,150,054).

The staff report ultimately recommended a $1 million mitigation fee based on the real estate value method. However, at the coastal commission hearing, one of the commissioners proposed adopting the $5.3 million mitigation fee based on the recreational value method. The Commission voted to adopt the $5.3 million mitigation.

With respect to rough proportionality, the court found that the mitigation fee satisfied the standard articulated in Dolan because the amount of the fee was determined by quantifying the recreational value of the acre of beach by using certain types of expenditures by visitors as a reflection of value. The recreational value of the beach is viewed as "the difference between what a person is willing to pay to enjoy it and how much it actually costs to do so," also known as consumer surplus. The staff report used a $13 per person per visit value, which it derived from studies calculating the recreational value of southern California beaches. The court found the fee was based on pertinent data and was focused properly on the economic recreational value, and therefore satisfied the rough proportionality standard.

The court's decision gives greater leeway to agencies in developing and calculating mitigation fees. The real estate value method initially chosen by the Commission would seemingly mitigate the loss of recreational value by providing for the purchase of another parcel of beach property. In upholding the recreational value method, however, the court allowed for wide discretion in calculating mitigation fees, and opened the door for fees that may overvalue actual impacts, with troubling implications for the calculation of mitigation fees in many other contexts.

John Flynn is a Partner in the Irvine office who represents private developers and public agencies in complex land use and environmental litigation matters. He has prosecuted and defended claims based on the Porter-Cologne Act, the Coastal Act, the California Environmental Quality Act and many more. He can be reached at (949) 833-7800 or jflynn@nossaman.com.

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