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City of San Marcos v. Loma San Marcos, LLC

California Court of Appeals, Fourth District, First Division

January 29, 2015

CITY OF SAN MARCOS, Plaintiff, Cross-defendant and Respondent,
LOMA SAN MARCOS, LLC, et al., Defendants, Cross-complainants and Appellants.

APPEAL from a judgment of the Superior Court of San Diego County No. 37-2010-00057827- CU-OR-NC, Earl H. Maas, III, Judge.

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[Copyrighted Material Omitted]

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Palmieri, Tyler, Wiener, Wilhelm & Waldron, Charles H. Kanter, Elise M. Kern, Erin K. Oyama and Gregory N. Weiler for Defendants, Cross-complainants and Appellants.

Lounsbery Ferguson Altona & Peak, Helen Holmes Peak, Jacqueline S. Vinaccia, Avnet K. Sidhu, Shawn M. Robinson; Shustak & Partners and Jennifer S. Hegemier for Plaintiff, Cross-defendant and Respondent.

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Loma San Marcos, LLC, Questhaven Pacific View, LLC, and La Paz Sunset, Inc. (collectively Loma San Marcos) purchased a 15-acre property subject to a security and lien agreement with the City of San Marcos (City). The agreement was entered into by the property's former owner to securitize fees due pursuant to a conditional use permit that allowed the owners to convert the property from a recycling facility to a movie studio. Under the agreement the property owner was obligated to pay the City impact mitigation fees by dates certain. After purchasing the property and negotiating an amendment to the agreement extending the payment deadlines, Loma San Marcos failed to pay the fees. As a result and based on other terms of the agreement, the City brought this judicial foreclosure action. After trial, the court entered judgment in favor of the City.

Loma San Marcos appeals, contending the fees are not due because (1) the City has yet to issue permits; (2) the renegotiated agreement is unenforceable because it is not supported by valid consideration; and (3) even if otherwise enforceable, the fees set in the agreement are illegal under the Mitigation Fee Act (Gov. Code, § 66000 et seq.)[1] and the takings clause of the Fifth Amendment to the United States Constitution. We reject these arguments and conclude Loma San Marcos, represented by sophisticated real estate investors, entered a binding agreement with the City to pay the fees at issue or face foreclosure of the property. We affirm the judgment.


Loma San Marcos purchased the property at issue, located at 1601 San Elijo Road in San Marcos, from San Marcos North County Resource Recovery Facility, Inc. (NCRRF) in 2005. NCRRF used the property as a recycling facility until June 1995. Thereafter the property sat vacant. NCRRF eventually entered into an agreement to sell the property to another entity that wanted to use it as movie studio. On June 25, 2003, NCRRF applied for a conditional use permit to entitle the property for this new use. On April 13, 2004, the city council approved conditional use permit No. 03-596 (CUP) and amended special Plan 03-41, authorizing the new use.

Among other restrictions, the CUP was conditioned on NCRRF's agreement to pay public facility fees "in accordance with the latest adopted ordinance and resolution determined for the project" and to pay a fair share contribution towards improvements to roadways and public infrastructure off-site. To satisfy these conditions, and effective the same day as the CUP,

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NCRRF and the City entered into a "Real Property Security and Lien Agreement Regarding Mitigation Payments for Project Impacts and Consent to Annex into CFD 98-01, CFD 2001-01 and [CFD] 98-02" (Agreement). The Agreement was recorded with the county on June 14, 2004. It contemplated the sale of the property to "Alliance Holdings, L.L.C. ([also known as] San Marcos Studios) or another Buyer that will develop and operate the Property as an entertainment production facility pursuant to [a] separate agreement between [NCRRF] and such Buyer...." The Agreement set forth three phases of development: Phase 1(a) consisted "of use of up to 100, 000 square feet of the existing recycling structure for office use, marketing of the site, and temporary use of small sound stages for commercials and limited film productions"; phase 1(b) consisted "of permanent use of the site for large film production which will require construction of permanent production facilities"; and phase 2 was to "consist[] of construction of [an] office complex, to include [a] parking structure."

In accordance with the conditions of the CUP, the Agreement obligated NCRRF to pay the City a street improvement fair share payment of $1.116 million to mitigate impacts for improvements required on two adjacent roads and a public facility fee (PFF) of $1, 238, 198.[2] Both fees were to be paid on a schedule based on the three phases of the property's development. Two hundred thirty-four thousand dollars of the street improvement payment and $365, 579 of the PFF was due "upon use or occupancy of Phase 1(a), but in any event not later than December 31, 2006." A second installment of each fee in equal amounts to the first installment was due "upon the earliest to occur of the following: (i) issuance of the first building permit for Phase 1(b); (ii) December 31, 2006; or (iii) use or occupancy of the site for large production film operations (other than small commercials or limited film production)." Finally, the third and final installment of each fee was due "upon the issuance of the first building permit for Phase 2."

In the event the property had not been sold by December 31, 2006, either NCRRF or the City could terminate the Agreement and NCRRF was not liable for the fees. The Agreement stated its term was 60 months, but also that the Agreement would terminate earlier if the owner failed to comply with its terms or satisfy its obligations. Another provision stated "[u]pon the occurrence of any breach justifying the termination of the Agreement including, but not limited to, ... failure to timely pay development fees, Road Improvement Payments, PFF, [or] impact fees... [the] City shall have the

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right to issue a notice of termination to Owner...." If the owner failed to remedy the breach within 10 days, the owner would "have no further right or entitlement to the use permitted by CUP 03-596" pending modification of the CUP.

The issuance of a notice of termination gave the City the "right to undertake any action necessary" to secure compliance with the notice. Any costs related to enforcing the notice would be included with any unpaid fees owed under the Agreement to "constitute an obligation running with the Property" and until reimbursed in full would "constitute a lien against the Property." The Agreement also contained an acceleration provision, which stated that the owner's failure to comply with the terms of the Agreement also gave the City the option to demand "[i]mmediate and full compliance with all requirements of CUP 03-596, including but not limited to, the acceleration of all payment obligations set forth in [the] Agreement, such that each such obligation is immediately due and payable by Owner." The clause also provided that the acceleration of payment obligations was "in addition to the remedy of termination" and that the City could "pursue any and all of its remedies, cumulatively and collectively."

The original entity interested in purchasing the property backed out. On February 25, 2005, however, NCRRF sold the property to Questhaven Pacific View, LLC (owned by John Baldwin) and La Paz Sunset, Inc. (owned by Conrad Prebys) for $8.75 million. In May 2006 these entities sold 72 percent of their interest in the property to Loma San Marcos, LLC (owned by Allan Kuebler) for $9 million. Before the purchase, each buyer reviewed a title report for the property disclosing the existence of both the CUP and the Agreement. After Loma San Marcos, LLC purchased its interest, Kuebler, on behalf of Loma San Marcos, LLC, entered into an addendum to the Agreement with the City to extend the December 31, 2006 payment deadline so it could have additional time to negotiate amendments to the Agreement. Specifically, the addendum stated Loma San Marcos, LLC "wishes to modify certain of the time periods set forth in [the Agreement] executed by and between the City and NCRRF and recorded in the San Diego County Recorder's Office...." The addendum extended the deadlines by which NCRRF was to have paid the impact mitigation fees and the Agreement's termination date from December 31, 2006 to March 1, 2007.

On February 28, 2007, Loma San Marcos, LLC and the City entered the "Amended and Restated Real Property Security and Lien Agreement Regarding Mitigation Payments for Project Impacts and Consent to Annex Into CFD 98-01, CFD 2001-01 and [CFD] 98-02" (Amended Agreement). The Amended Agreement was substantially the same as the original Agreement. It required the same total mitigation fees, but set a new payment schedule. The

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Amended Agreement provided the street improvement fair share payment and PFF associated with phases 1(a) and 1(b), totaling $1, 199, 158, would be paid according to an "automatic disbursement procedure and payment schedule." The payments would commence on March 1, 2007, with the first payment due September 1, 2007, and "the entire amount paid over a 12 month period at 6% interest accrued on the unpaid balance." The payments associated with phase 2 were due "upon the issuance of the first building permit for phase 2 or any interim use not requiring a building permit." The Amended Agreement provided that if the phase 2 building permit was not issued within five years, the PFF would be reassessed "based upon the public facility fees in effect at time of issuance of the first building permit for Phase 2."

The Amended Agreement contained the same payment acceleration clause as the original Agreement. If Loma San Marcos failed to comply with the Amended Agreement's terms, the City had the right to demand, and Loma San Marcos "the obligation to provide, immediate and full compliance with all requirements of CUP 03-596, including but not limited to, the acceleration of all payment obligations set forth in" the Amended Agreement, "such that each such obligation is immediately due and payable...." Like the original Agreement, the amended version operated as a lien and was recorded with the San Diego County Recorder's Office as an encumbrance on the property.

After the Amended Agreement was recorded, the property development continued to falter and the property primarily sat vacant. It was used for a commercial car photo shoot and rented as storage space several times.[3] Loma San Marcos failed to meet its payment obligations under the Amended Agreement, but the City permitted the interim uses to generate interest in the property and assist Loma San Marcos in generating income to make payments. On October 27, 2009, after several attempts to get Loma San Marcos to satisfy its payment obligations, the City sent a letter to Loma San Marcos demanding performance of "its obligations under the Amended Agreement" to pay "$2, 390, 625.00, plus interest accrued on the Phase 1 obligations from and after 1 August 2008, the dedication of required rights-of-way, construction of intersection improvements pursuant to plans to be approved by the City and annexation into the City's CFDs" by November 20, 2009. Loma San Marcus took no action to satisfy its obligations in response to the demand.

On February 18, 2010, the City sent Loma San Marcos a notice of termination pursuant to the Amended Agreement. The notice described Loma San Marcos's overdue obligations, including payment of the total amount of impact mitigation fees pursuant to the agreement's acceleration clause, and ...

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