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Building Industry Association of Central California v. City of Patterson

January 30, 2009; as amended March 2, 2009 and March 20, 2009


APPEAL from a judgment of the Superior Court of Stanislaus County. David G. Vander Wall, Judge. (Super. Ct. No. 610611)

The opinion of the court was delivered by: Dawson, J.


Opinion ordered partially published March 2, 2009. The opinion should be published in the Official Reports with the exception of parts I. and II.B.


Morrison Homes, Inc. (Developer) obtained a development agreement and tentative subdivision maps for the construction of two residential subdivisions in Patterson, California. At the time those documents were approved, the City of Patterson (City)*fn1 allowed developers to pay a fee of $734 per house in lieu of building affordable housing. About three years later, City increased this fee to $20,946 per house and sought to apply the increased fee to Developer's two residential projects among others.

Developer sued City claiming that the increased fee violated (1) its vested property rights, (2) its contractual rights under the development agreement, (3) various statutory provisions, and (4) constitutional provisions requiring voter approval of special taxes. The trial court found that the increased in-lieu fee was permitted under section 4.5(d)(ii) of the development agreement and the amount of the increase was reasonably justified. The court entered judgment accordingly, and Developer appealed.*fn2

We will conclude that the meaning of the contractual term "reasonably justified" presents a question of law and that, under an objective test, the term is meant to incorporate the legal standards generally applied to such fees. Those legal standards require that the amount of a development fee be limited to the cost of that portion of a public program attributable to the development. City has failed to show that the increase in its in-lieu fee satisfies this standard and, therefore, has failed to show that the increase was "reasonably justified" as required by the development agreement.

The judgment is reversed and the matter remanded for further proceedings.


Development Project

Developer owns two residential subdivisions, known as Magnolia and Bella Flora and consisting of 214 single family residential lots. The subdivisions are part of a larger development known as Patterson Gardens, which contains 305.3 acres that are divided into seven different areas or phases. Plans for Patterson Gardens include five areas of low density residential housing that cover 228.5 acres and contain a total of 985 dwelling units.

City conducted environmental and land use review in connection with its approval of the proposed development of Patterson Gardens. Also, pursuant to Government Code section 65864 et seq., City entered into a development agreement with Developer's predecessor-in-interest, dated January 21, 2003 (Development Agreement). That agreement provides for the development of Patterson Gardens and establishes certain development rights in that project.

The City Council approved the Development Agreement in January 2003, and that approval became ordinance No. 648.

Section 5.1 of the Development Agreement states that, except as the agreement provides otherwise, the developer shall pay only those fees in effect prior to the effective date of the Development Agreement and specifically listed in exhibits D-1 (residential development) and D-2 (retail/office development). Those exhibits list certain capital facility fees, connection fees, and use fees. Exhibit D-1 lists over 20 fees, including an affordable housing in-lieu fee at $734 per unit. Exhibit D-1 also states that the affordable housing in-lieu fee is referenced in section 4.5 of the Development Agreement.

Section 4.5 of the Development Agreement addresses how the parties will satisfy City's affordable housing objectives. The developer has four alternatives: (1) build affordable housing units; (2) develop senior housing within the project; (3) obtain a sufficient number of affordable residential unit credits from other residential developments within City; or (4) pay an in-lieu fee at the time the building permit is issued for a market rate housing unit.

Section 4.5(d)(ii) of the Development Agreement, which is central to the contractual issues, provides in full:

"Developer shall pay an in-lieu fee in an as-yet undetermined amount per EDU [equivalent dwelling unit] for moderate-income housing and an as-yet undetermined amount per EDU for low and/or very low-income housing, but in no event less than the current fee of $734.00 per EDU. Developer acknowledges that the City is currently preparing an updated analysis of its Affordable Housing fee and hereby agrees to be bound by the revised fee schedule, including indexing as provided by ordinance at the time of adoption of the fee, providing the same is reasonably justified. Said fee shall be paid at the time a building permit is issued for each Non-Affordable Unit."

The City Council also adopted resolution No. 2003-05 in January 2003. The resolution approved "the combined preliminary/final development plan and vesting tentative subdivision map for the Patterson Gardens project . subject to the conditions set forth in Exhibit E hereto." Condition No. 1 provided: "Development of Patterson Gardens shall be in accordance with the approved Final Development Plan, as modified by these conditions and as may be modified by a development agreement between the City and developer." Condition No. 1 also stated that "the terms of the development agreement will control" in the event of a conflict with the conditions.

In-Lieu Fee

City first adopted an "affordable housing in-lieu fee" in 1995. The fee originally was set at $319 per new single family home, payable as a condition to the issuance of a building permit for such construction.

In May 2001, City received a study prepared by its consulting firm, Crawford Multari & Clark Associates, which addressed certain fees and recommended raising the affordable housing in-lieu fee. That study reviewed four different approaches to calculating the affordable housing in-lieu fee. One approach, the "leverage" analysis, considered the cost of providing an affordable single family house and assumed federal or state funding would require the local government to provide only 9 percent of the total amount needed. It produced a fee of $734 per unit.

In July 2001, the City Council adopted resolution No. 2001-53, which increased the affordable housing in-lieu fee to $734 per new single family home.

In November 2005, the City Council adopted resolution No. 2005-114, which adjusted the fees allowed under certain development agreements, including the agreement for Patterson Gardens. The resolution stated that the fees assessed under the development agreements could be adjusted periodically to reflect increases in the current construction cost index.*fn3 The resolution also stated that the index had experienced larger than normal increases and these increases warranted an adjustment to the ...

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