High Court Upholds County, City Fees on Hotel Conversions

Property owners who want to convert residential hotels to hotels for tourists can be required to provide replacement housing for the poor or money to build it, the California Supreme Court ruled Monday.

The 4-3 ruling allows California cities and counties to pass regulations that require groups of owners to mitigate the impact caused by changes to their property. Hundreds of cities and counties, including Los Angeles, now impose such development fees.

In an opinion written by Justice Kathryn Mickle Werdegar, the court upheld mitigation fees enacted by city councils and other legislative bodies if they are applied generally and without discrimination to a class of property owners.

“It is the detrimental effects of a change in the use of property that motivates the regulation,” Werdegar wrote. “A use not in itself noxious or harmful, such as the operation of a tourist hotel, may nonetheless call for mitigation.”

The state high court reviewed a San Francisco law that requires owners of residential hotels to pay a fee to a special city real estate fund to convert to a tourist hotel or to set aside guest rooms for low-income residents.

Supporters likened San Francisco’s law to the fees that many cities require developers to pay to cover the costs associated with growth. Opponents, by contrast, said San Francisco’s law was an attempt to hold hotel owners’ property for ransom.

Thomas and Robert Field, owners of the San Remo Hotel in San Francisco, paid a $567,000 conversion fee under protest to San Francisco when they turned their 62-room building into an all-tourist inn several years ago. The owners then sued San Francisco, contending that the law was unconstitutional.

The court majority said the law affected 500 residential hotels in the city, a sizable class, and was intended not to raise general revenues but to ensure a continuing supply of low-income housing.

“A burden placed broadly and nondiscriminatorily on changes in property’s use is not the equivalent of an arbitrary decision to hold an individual’s property for ransom,” Werdegar wrote.

Justice Marvin Baxter, joined by Justice Ming W. Chin, partially dissented from the ruling. They differed with much of the majority’s analysis and argued that the case should have been sent back to a lower court to determine whether San Francisco’s law complied with legal requirements.

Justice Janice Rogers Brown, in a withering dissent, contended that the San Francisco ordinance represented a “taking” of private property by the government.

“Theft is theft even when the government approves of the thievery,” Brown wrote. “Turning a democracy into a kleptocracy does not enhance the stature of the thieves; it only diminishes the legitimacy of the government.”

Brown complained that the decision means that property rights in California are now “hollow.”

“The right to express one’s individuality and essential human dignity through the free use of property is just as important as the right to do so through speech, the press or the free exercise of religion,” she wrote.

Monday’s ruling ensures that local and state governments can continue to use development impact fees widely, said San Francisco City Atty. Dennis Herrera.

“These fees provide a crucial source of funding for infrastructure, such as streets, water and schools, and are used to reduce the environmental impacts of real estate projects.”

San Francisco Deputy City Atty. Andrew W. Schwartz, who argued before the state high court, said property owners who want to challenge mitigation fees such as San Francisco’s now will have to prove that they are arbitrary.

Andrew Zacks, an attorney for the hotel, complained that the ruling in San Remo Hotel vs. City and County of San Francisco, SO91757, makes it “virtually impossible for property owners to win.”

He said the hotel owners will take their case to federal district court to argue that the law violates the U.S. Constitution.

Pedro Echeverria, chief assistant city attorney for Los Angeles, said the court appears to have given cities flexibility to address the impact of development. He said Los Angeles has a traffic mitigation fee imposed on development that leads to increased traffic. Monday’s ruling gives the city a “greater degree of comfort.”