Courts Split on Legality of City Fees : Two Rulings Take Opposite Views of Builder Obligations

In Santa Monica, a developer agrees to pay more than $14 million to improve streets, build parks and fund construction of low-income homes in exchange for city approval of his 17-acre office complex.

In Ventura, a home builder pays a “traffic-mitigation fee” of $5,245 on each unit to fund major roadway projects and keep traffic flowing smoothly.

And in Boston, a developer of a 1.8-million-square-foot office complex must first start a job-training program and contribute $8 million to a housing trust fund.

Whether cities can legally levy such charges--and, if so, how high those charges can be--has been debated and litigated for more than a decade with no firm conclusions. And two court decisions issued earlier this month may have raised more questions than they answered.

Court Rejects Appeal

The first decision, issued by the U.S. Supreme Court on Oct. 11, effectively rejected an office developer’s argument that fees charged by the city of San Francisco to subsidize the transit system are unconstitutional. The court refused, without comment, an appeal by a developer, which claimed the city law unfairly forces property owners to pay for public services.

Although many elected officials hailed the decision as an affirmation of a city’s right to make developers pay for items ranging from road projects to day care, their enthusiasm was quickly dampened.

On Oct. 19, an Orange County Superior Court judge rejected a voter-approved slow-growth measure in San Clemente, saying it could illegally require today’s builders to remedy problems caused by projects that were built years ago.

“We won one and lost one this month,” said Ken Willis of the Building Industry Assn. of Southern California, a trade group. “But the issue (of development fees) hasn’t been laid to rest.”

Effect on Ballot Measures

The most immediate issue raised by the two decisions is how the ruling on the San Clemente initiative will affect similar slow-growth measures on November ballots in three nearby cities--Huntington Beach, Costa Mesa and San Juan Capistrano.

The San Clemente measure, approved by a 2-1 vote margin last June, set stringent standards for traffic flow, fire and police protection, and flood control. If a new development threatened the quality of those services, and the builder couldn’t mitigate the problems, the project would not be allowed to go forward.

But in voiding the measure, Superior Court Judge John C. Woolley said the initiative could force today’s developers to correct mistakes made by past city planners and remedy problems caused by older developments.

Some builders have indicated they will use the judge’s decision in the San Clemente case to challenge the three upcoming initiatives if any of the them are approved by voters.

Impact on City Fees

“There’s no guarantee that the same argument would prevail in the other cities,” said Doug Ring, head of the real estate practice in the Los Angeles law office of Shea & Gould. “But it is some ammunition” for developers.

Over the long run, however, it is the refusal of the U.S Supreme Court to hear an appeal of the San Francisco case that may have the greatest impact on a city’s ability to charge developer fees.

Some builders and others in the industry fret that the decision, which effectively upholds the ruling by the California Supreme Court earlier this year, could result in a vast expansion of builder fee programs across the nation.

“I don’t know if you could say that the court has given a blank check to cities, but it has come awfully close to it,” said William D. North, chief counsel and executive vice president of the National Assn. of Realtors.

Others Not Sure

“The ruling will undoubtedly cause a lot of states and municipalities to expand the use of . . . fees to finance their infrastructure costs.”

Other experts aren’t so sure.

“You really can’t read too much into this decision,” said Daniel P. Garcia, partner in the Los Angeles law firm of Munger, Tolles & Olsen and former president of the city Planning Commission.

Garcia notes that the high court’s refusal to hear the case consisted of a simply worded statement that the majority found no “substantial federal question” involved in the case.

“Maybe the justices just didn’t find the facts of this particular case appealing, or they just don’t have time to review the whole fee issue now,” he said. “There will be plenty of other (fee-related) cases later.

“Any municipality that construes this decision to be a license to pillage every poor developer is making a serious mistake.”

Some ‘Gray Areas’

Although previous court decisions have enabled cities to require builders to mitigate problems that are a direct result of their projects--such as increased traffic on bordering streets--it is still unclear whether cities can also charge fees for items that aren’t necessarily linked to their buildings.

Some developers complain that cities are taking advantage of this “gray area” of the law by charging questionable fees in a gamble that builders won’t sue. More often than not, the gamble pays off.

“Paying the fees is often less expensive and faster than going to court,” Ring said. “So, some developers swallow their pride and just pay the money.

“Besides, even if you sue and win, you don’t make many friends at City Hall. That could hurt you when you eventually come back to get your next project approved.”

Although some developers have labeled fees for “gray area” items such as child-care facilities and far-away traffic projects “legalized extortion” by local governments, a few builders say they don’t mind paying them.

Doesn’t Resent Fees

“I don’t resent the fees,” said Jerome H. Snyder, who is paying the City of Santa Monica more than $14 million in fees to build the 1.3-million-square-foot Water Garden office complex.

“It’s a mistake for developers to think that zoning is a God-given right,” Snyder said. “We have an impact on a community when we build something, and we have an obligation to that community to mitigate the problems we create.”

Developer Jack Spound says the fees he would pay to build a proposed office complex in Woodland Hills would be “simply a cost of doing business,” much like charges for materials and labor.

But Spound frets that, if Los Angeles and other cities start charging developers even higher fees, builders will move to outlying areas where the development process is faster and less expensive.

Consumer Pays Fees

“If you can build in a cheaper area, you don’t have to charge as much rent to make a profit,” Spound said. “If more developers move away from the city, you’ll see more businesses move away, too, so they can save money on rent. And that would hurt the entire city’s economy.”

Still, some experts say it’s not really builders and developers who are paying these fees; ultimately, it’s the consumer.

Realtor attorney North contends that the fees levied on home builders are passed on to buyers through higher sale prices, exacerbating the nation’s housing affordability problems.

Similarly, fees paid by commercial developers are passed on to tenants in the building through higher rents. Tenants offset these higher costs by charging consumers more for their goods or services, North said.

Spending Cut Back

“It might look like the builder or developer is getting stuck with the tab, but it’s always the little guy who pays for the lunch at the end,” North said.

Slapping fees on builders might not be the best way to raise money, but many cities have few other ways to fund new transportation projects, upgrade sewers, pay for schools and parks, and provide basic fire and police protection.

State and federal governments alike have cut back sharply on aid to the nation’s cities. California’s financial woes have been aggravated by Proposition 13, which limits the ability of local governments to raise property taxes.

With politicians wary of proposing anything that looks like a tax hike and voters generally loath to approve new bond measures, it looks like builder fees have no place to go but up--at least for the next year or two.

But down the road, either a court decision or an end to the nation’s long building boom could cause those fees to shrivel, forcing cities to look for other sources of cash. “And that,” said attorney Ring, “is when things are going to get really interesting.”