New Case Could Have Far-Reaching Implications For Collection of In Lieu Fees

Building Industry Association of Central California v. City of Patterson holds that affordable housing in lieu fees must be “reasonably related” to the “deleterious impact” caused by new housing.

Although the specific question raised in Building Industry Association of Central California v. City of Patterson involved the interpretation of a development agreement (“DA”), the Court’s answer could have far reaching implications for the collection of affordable housing in lieu fees throughout the State. In this case, developers and the City of Patterson entered into a DA for two residential subdivisions in the City. At the time the DA was entered, the City’s affordable housing in lieu fee was $734 per unit. The DA, however, recognized that the City was updating its affordable housing in lieu fee and the developer agreed to pay the updated fee so long as the updated fee was “reasonably justified.”

Three years later, the City raised the affordable housing in lieu fee to $20,934 per unit. The developer refused to pay, arguing that the challenged as not “reasonably justified.” In interpreting the term “reasonably justified” from the DA, the Court held that the term meant that any increase in the affordable housing in-lieu fee would conform to “existing law.” The Court then examined the new in lieu fee under the rubric of San Remo Hotel v. City and County of San Francisco (2002) 27 Cal.4th 643 and the Mitigation Fee Act (Government Code section 66000 et seq .) and determined that the new in lieu fee did not conform to existing law because the new in lieu fees did not show a reasonable relationship between the amount of the fee imposed and the deleterious public impact caused by the development of new housing in the City. Specifically, the Patterson fees had divided the projected cost of developing the City’s share of the regional affordable housing needs by the total number of unentitled housing units in the City, with the result being a per unit fee of $20,946. While the Court stopped short of applying a Nolan/Dolan nexus test to the in lieu fees, the Court did hold that this method of calculation did not support a finding that the in lieu fees imposed on the developer’s project bore any reasonable relationship to any deleterious impact associated with the project.

It is not clear at this time exactly how far this decision will reach. However, to avoid potential challenge, local agencies who are revising in lieu fees should be careful not to engage in the type of calculation used by the City of Patterson, and should take care to supply evidence that new in lieu fees meet the Patterson test and bear a reasonable relationship to the impact of new development. Additionally, it may be advisable for local agencies to prepare in lieu fee studies similar to those prepared for fees adopted under the Mitigation Fee Act to aid in the defense of challenged in lieu fees.

For more information about this case or other development agreement matters, contact the authors; Julia Bond or Ed Grutzmacher.

Meyers Nave’s Land Use Practice Group is chaired by Steve Mattas.