The City of Patterson's in-lieu affordable housing fee has been invalidated by the Fifth District Court of Appeal, which rejected the city's methodology for setting the fee. Homebuilders celebrated the decision as a victory in their long fight to constrain development fees, while affordable housing advocates and municipal attorneys described the ruling as limited.

Like about one-third of cities and counties in California, Patterson imposes inclusionary zoning that requires market-rate homebuilders to provide a certain percentage of units to low- or moderate-income households. And, like many jurisdictions, Patterson permits builders to pay an in-lieu fee rather than build the actual units. Patterson based its in-lieu fee on the 642 affordable units the city was allocated in the 2002 Regional Housing Needs Assessment (RHNA) for Stanislaus County. Development of those 642 units would require a subsidy of $73.5 million, according to a city consultant. The city divided that figure across the 3,507 "unentitled units" in town as of January 2005 to reach an impact fee of $20,956 per unit.

The court, however, could find "no reasonable relationship" between the extent of the city's affordable housing need and the development of either the unentitled lots or the particular subdivisions at issue in the litigation.

"It is the first case that says affordable housing type of fees can be measured by the same kind of generally prevailing reasonable relationship standard that applies to fees in general," said attorney David Lanferman, who represented the Building Industry Association (BIA) of Central California in the lawsuit. "You need to have at least some evidence that the fees are related to the burden created by the development's impact."

California courts have not applied the Nollan/Dolan heightened scrutiny standard of review to legislatively adopted fees, Lanferman said. The Fifth District did not apply heightened scrutiny but, because the subdivision in question was the subject of a development agreement that permitted a "reasonably justified" fee increase, the court used the standard from the state Supreme Court's decision in San Remo Hotel v. City and County of San Francisco, (2002) 27 Cal.4th 643 (see CP&DR Legal Digest, April 2002). In San Remo, the court insisted on a "reasonable relationship" between fees and impact. Thus, The Fifth District ruled, citing San Remo, there must be "a reasonable relationship between the amount of the fee, as increased, and ‘the deleterious public impact of the development.'"

That holding, said Lanferman, is significant because it is the first application of the San Remo standard, and it means that cities and counties must show a connection between construction of market-rate housing and the need for affordable units.

However, Mike Rawson, an affordable housing advocate and attorney with the Public Interest Law Project, said builders may be reading too much into the decision.

"It's a little to early to tell the legal implications. It's a very narrow holding," Rawson said. The court merely ruled the fee justification study was not related to how the city applied the fee to the subdivision, he said. Rather than viewing the fee as replacing the 10% of affordable units the project did not provide, the city relied on its RHNA number to determine the fee. "I think this is a peculiar case," he said.

Sacramento attorney William Abbott, co-author of Exactions and Impact Fees in California, said Patterson got off track when it used its RHNA number, which had no relationship to the project at hand. "That analysis is not a nexus analysis, it's a state housing policy," he said. "This is not how most agencies generate housing fees."

Abbott said the court's application of San Remo was not a big deal. Rather, the case illustrates that when a city puts everything into a contract such as a development agreement, the city loses its deferential standing in court, he observed.

The project at issue here is two subdivisions containing 214 single-family residential lots within the larger Patterson Gardens development. In January 2003, the city approved a development agreement with Morrison Homes for the two subdivisions. The agreement provided the developer with four options for meeting the city's inclusionary housing mandate. Morrison could build affordable units, develop senior housing, obtain affordable unit credits from other developers or pay an in-lieu fee when building permits were issued. At the time the development agreement was approved, the city's in-lieu fee was $734 per market-rate unit, but the agreement noted the city was preparing a new fee schedule and Morrison would be bound to the revised fees.

Since 1995, the city had assumed the in-lieu fee revenue would leverage additional federal grants and loans to provide adequate funding. The new fee schedule marked a policy change. It placed the entire burden of meeting the city's RHNA affordable housing allocation on market-rate builders. The RHNA allocated to Patterson 235 units of very low-income housing, 182 units of low-income housing and 225 moderate-income units, which together would require a subsidy of $73.5 million. In March 2006, the city adopted the new fee of nearly $21,000 per market-rate unit.

Morrison Homes and the local BIA sued, but San Joaquin County Superior Court Judge David Vander Wall upheld the housing fee as reasonable. On appeal, the builders argued the fee increase violated the development agreement because the fee was not "reasonably justified." The city argued that phrase in the agreement meant typical legal requirements had been waived. But the court found existing law would still apply to the fee increase.

Patterson's fee, the court determined, was not substantially different from the fee in San Remo, which San Francisco imposed on hotel owners who converted residential living units into tourist hotel rooms. Hence, Patterson needed to prove a reasonable relationship between the fee and the project's impact. The city apparently made little attempt to demonstrate a nexus existed, instead contending the fee justification study "clearly shows the need for affordable housing generated by the new construction." That argument appeared to miss the point.

"The record in this matter reveals no reasonable relationship between the extent of the city's affordable housing need and the development of either (1) the 214 residential lots that constitute the two subdivision owned by developer or (2) the 3,507 unentitled lots identified in the fee justification study," Justice Betty Dawson wrote for the court. "No connection is shown, by the fee justification study or by anything else in the record, between this 642-unit figure and the need for affordable housing associated with new market-rate development."

The court initially filed its decision in late January. After the BIA asked the court to publish the decision, the court significantly reworked the most important part of the opinion and then approved the publication, meaning the opinion may be cited as legal precedent. The court modified the opinion one more time after the initial publication.

In the meantime, Patterson has changed its fee structure again. The city now requires builders either to provide 15% of units as affordable or to pay an amount that will fully fund the units' development.

The Case:
Building Industry Association of Central California v. City of Patterson, No. F054785, 09 C.D.O.S. 2617, 2009 DJDAR 3027. Filed January 30, 2009. Modified and ordered published March 2, 2009. Modified and rehearing denied March 20, 2009, at 2009 DJDAR 4327.
The Lawyers:
For the BIA: David Lanferman, Sheppard, Mullin, Richter & Hampton, (415) 434-9100.
For the city: George Logan, city attorney, (209) 357-1431.