On March 5, 1996, the California Supreme Court filed its long-awaited decision in Ehrlich dealing with the reasonableness of conditions placed on a residential development by Culver City ("City") regarding (1)the payment of $280,000.00 to be used for public recreational facilities and (2)the payment of $32,000.00 pursuant to the City's Art and Public Places Program. The plaintiff challenged the imposition of both fees on the grounds that the fees were unconstitutional takings without just compensation in violation of the 5th and 14th Amendments of the United States Constitution and Article I, Section 19 of the California Constitution.
Summary of Judicial Proceedings.
The trial court invalidated the $280,000.00 Recreation Fee holding that there was "no reasonable relation between the plaintiff's project and the need for public tennis courts in the City" and concluded that the Recreation Fee was "simply an effort to shift the cost of providing a public benefit to one no more responsible for the need than any other taxpayer". However, the trial court declined to set aside the $33,200.00 Art Fee, ruling that it was not an unconstitutional taking.
The Court of Appeal initially affirmed the trial court judgment in its entirety, but on rehearing, modified its opinion to reverse that portion of the judgment invalidating the $280,000.00 Recreation Fee. The Court of Appeal found there was a "substantial nexus" between the proposed condominium project and the $280,000.00 exaction. Thus, the Recreation Fee was not, in the Court of Appeal's judgment, an unconstitutional taking without just compensation. The Court of Appeal also upheld the in-lieu art fee.
The California Supreme Court concludes that (1)the City has met its burden of demonstrating the required connection or nexus between the rezoning - to permit a residential use of a parcel of land zoned for private recreational use -- and the imposition of a monetary exaction to be expended in support of public recreational purposes as a means of mitigating that loss. However, the Court also concludes that the record is insufficient to sustain the City's determination that plaintiff pay a so-called mitigation fee in the amount of $280,000.00. Accordingly, the Court directs that the case be remanded to the City for additional proceedings.
The Analysis of the California Supreme Court.
The majority opinion analyzes two recent and important U.S. Supreme Court cases, Nollan vs. California Coastal Commission and Dolan vs. City of Tigard and applies them to these facts. Nollan held that when a property owner applies for a development permit, a governmental agency cannot require the owner to dedicate a portion of his or her property for a public purpose unless there is an "essential nexus" between a legitimate public interest which would have permitted a denial for the permit altogether and the purposes served by the required dedication. In that case, the Court rejected the Commission's requirement that the Nollans dedicate an easement over a portion of their property as a condition for approval of a building permit. In Dolan, the Court held that if the "essential nexus" exists between a legitimate public purpose and the required dedication, the condition is valid if its extent is "roughly proportional" to the impact of the project. In essence, Nollan dealt with the circumstances in which any dedication can be imposed and Dolan with the extent of that dedication.
Nollan and Dolan Apply to Monetary Exactions.
The first significant aspect of the Ehrlich opinion is its holding that the Nollan and Dolan analysis applies to monetary exactions. Both of those cases dealt with physical invasions of the owner's property. Some courts and commentators believed that this was a crucial difference and that much greater deference should be given to governmental agencies with respect to development fees. However, all seven judges in Ehrlich agreed that the "essential nexus" and "rough proportionality" tests were applicable to the $280,000 fee imposed by the City. This result does not mean, however, according to the opinions in Ehrlich, that these standards must be met with respect to all development fees. All seven judges agreed that generally applicable fees were not subject to this "heightened analysis"; only those fees specifically imposed on a particular project were entitled to be judged by the Nollan and Dolan criteria with all others being tested under a "rational basis" standard typically used by courts in analyzing state actions under the Fourteenth Amendment. This is a crucial distinction because the effect is to virtually assure the validity of any general fee imposed on all projects and relegate the stricter standards to the more unusual case in which the fee is unique to a particular project and is imposed in lieu of an outright denial for the requested permit.
A Recreational Fee is Justified.
The majority opinion then applies the Nollan and Dolan requirements and finds that the City was justified in imposing some recreational fee on Mr.Ehrlich's project. The City had imposed the fee because it lacked sufficient recreational facilities and, even though Mr.Ehrlich's project had been a private club, it had helped satisfy the public's need for these uses. Mr.Ehrlich argued that because his facility was private, the City had no business imposing a fee on him to satisfy a public requirement - such a burden should be borne by the taxpayers of the City as a whole, not by him. In a second significant aspect of the decision, the court holds that simply because the facility was private, its loss nevertheless had consequences for the public because it removed a recreational opportunity. This loss justified the City in imposing a fee on Mr.Ehrlich to compensate for the City's loss. (It was this aspect of the opinion which drew a dissent from two judges, both of whom concluded that it was unfair for the City to saddle Mr.Ehrlich with an obligation which should be paid for by the public.)
The Amount of the Recreational Fee is Not Justified.
Finally, however, the court concluded that the record did not contain sufficient information to justify the fee which was imposed. Therefore, the trial court's judgment was reversed and the case remanded to the City for further findings. In this part of the opinion, the court offered some interesting suggestions as to what might constitute an appropriate measure of the City's loss. First, the court stated that the City could not impose a fee based upon the cost to replace the facilities which were on Mr.Ehrlich's property. The court recognized that to do so would, in essence, permit the City to appropriate the facilities. Then the court made three suggestions as to what might be an appropriate fee:
The City might impose a fee equal to the administrative costs which might be incurred in processing an application for a rezoning of some other piece of land in the City which would be used for a similar private recreational facility.
The City might also base a fee upon the monetary incentives it might have to provide a developer to induce him or her to build an equivalent project on another site.
The City might require Mr.Ehrlich to dedicate another site in the City for the same purpose or, assuming that was impractical, impose an in-lieu exaction to accomplish the same objective.
Questions Raised by the Supreme Court's Decision.
The Ehrlich case raises a number of questions which should be of great concern to property owners:
- Do property owners have any significant protection against fees which are generally applicable to all projects? The apparent effect of Ehrlich is that there is very little protection. If all generally applicable fees are judged by a standard which is much more deferential than that applied in Nollan and Dolan, it is unlikely that many will be invalidated. The court stated: "Of course, as we have already observed, it is not at all clear that the rationale (and the heightened standard of scrutiny) of Nollan and Dolan applies to cases in which the exaction takes the form of a generally applicable development fee or assessment - cases in which the courts have deferred to legislative and political processes to formulate 'public program[s] adjusting the benefits and burdens of economic life to promote the common good.' [cite]" (96 D.A.R. at 2567)
- What other private uses can justify the imposition of mitigation exactions because they have a public purpose? If a city can impose a fee as a result of the loss of a private recreational facility, what is to prevent a development fee on other projects where the use which was replaced could be said to have some other public purpose? When the City changed the zone on Mr.Ehrlich's land to permit a condominium, the residents of the City lost an "opportunity" to use private recreational facilities which had created a public benefit. (Even though the club had been closed and demolished.) To quote the court, "Without such a facility, residents would have to travel farther, wait longer, and put up with other inconveniences and restricted choices in their recreational pursuits. Thus, the fact that a recreational facility is privately rather than publicly owned does not erase its value to the public." (96D.A.R. at 2566) Other private uses which have public benefits remain to be discovered.
- What will be the ultimate basis of a constitutionally acceptable fee? The court's suggestions leave a great deal of uncertainty - for example, they could be read to permit the City to impose a fee which would equal the sum of the City's processing costs for another private recreational project plus any financial incentives the City might have to provide the developer in order to attract such a project. This amount might well exceed the $280,000 originally imposed.
Conclusion.
Ehrlich is an important case in the arena of "takings" and nexus requirements for development and we should all be alert to subsequent articles and interpretations of this California Supreme Court opinion. Because the case involves interpretations of the Federal Constitution, there may be an appeal from the California Supreme Court to the U.S. Supreme Court.
No doubt all of the above questions, and others, will be fruit for future litigation as the courts grope their way to a mature analytical framework applicable to these issues. We will be participating in, and monitoring, these developments and will be pleased to answer any questions regarding Ehrlich or any related matters. Please feel free to call us at your convenience.