Increase In Affordable Housing In-Lieu Fee Was Not Proper Where City Failed To Show That The Increase Was Reasonably Justified

In Building Industry Association of Central California v. City of Patterson, (— Cal.Rptr.3d —, Cal.App. 5 Dist., March 2, 2009), a California Court of Appeal considered whether a city could properly increase an affordable housing in-lieu fee under a development agreement it entered into with a developer of two residential subdivisions. The Court of Appeal held that the city failed to show that the increased in-lieu fee was limited to the cost of that portion of a public program attributable to the development and thus, failed to show that the increase was “reasonably justified.”


The City of Patterson (“City”) approved a development agreement and tentative subdivision maps for two residential subdivisions being developed by Morrison Homes, Inc. (“Developer”). At the time City approved the documents, it allowed developers to pay a $734 per house fee in lieu of building affordable housing. The development agreement (“Agreement”) entered into between City and Developer’s predecessor-in-interest in 2003, provided that the developer shall only pay those fees that were in effect prior to the Agreement’s effective date and that are specifically listed in the exhibits to the Agreement. One exhibit lists more than twenty fees, including an affordable housing in-lieu fee of $734 per house.

Under section 4.5 of the Agreement, Developer had the option of building affordable housing, developing senior housing within its project, obtaining credits from other developments within City, or “pay[ing] an in-lieu fee at the time the building permit is issued for a market rate housing unit.” Section 4.5(d)(ii) provides that Developer must “pay an in-lieu fee in an as-yet undetermined amount per EDU [equivalent dwelling unit] . . . but in no event less than the current fee of $734.00 per EDU.” Section 4.5(d)(ii) further provides that City is currently preparing an updated analysis of its fee for affordable housing and that Developer “agrees to be bound by the revised fee schedule . . . providing the same is reasonably justified.”

A “Fee Justification Study” recommended that City increase the in-lieu fee to $20,946 per market rate unit. The recommendation did not rely, as City previously had relied, on the fact that the local in-lieu fee “could be used as leverage to obtain federal grants and loans,” but was instead based on bridging the “affordability gap” that exists “between the cost of a new market rate unit and the cost of units affordable to very low, low, and moderate income households.” In March 2006, the City Council adopted a resolution which set its affordable housing in-lieu fee at $20,946.

After City attempted to apply the increased fee to Developer’s two residential projects, Developer sued the 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 fee increase was reasonably justified and the Developer appealed.


The Court of Appeal reversed the decision of the trial court. The court held that City failed to show that the fee increase was reasonably justified as required by the Agreement.

The court found that “Developer agreed to be bound by the revised fee provided that it was reasonably justified.” City and Developer disputed the meaning of “reasonably justified.” The court concluded “that an objectively reasonable person would expect the term ‘reasonably justified’ to mean that any increase in the affordable housing in-lieu fee would conform to existing law.”

The court stated that local government’s authority to “impose exactions as a condition of developing land is limited by various rules of law” including the takings clause of the California Constitution and the United States Constitution. At issue here “is the requirement that a land use regulation substantially advance a legitimate state interest.” This is sometimes referred to as a “means-end test,” which “requires the property regulation in question (the means) to advance the purpose the government is seeking to achieve (the end).” The court found that the level of constitutional scrutiny to be applied here requires that the fee must bear a reasonable relationship to the “deleterious public impact of the development.” The increase in the in-lieu fee is not “reasonably justified” under the Agreement unless this reasonable relationship test is met.

The court stated that it located nothing in the record “that demonstrates or implies the increased fee was reasonably related to the need for affordable housing associated with the project.” The record indicated that the $20,946 fee was based on an allocation to City of 642 units of affordable housing. The court, however, found that no connection was shown between the “642-unit figure and the need for affordable housing associated with new market rate development.”

The court concluded that the increased fee of $20,946 violated section 4.5(d)(ii) of the Agreement because the fee was not reasonably justified. Accordingly, the Court of Appeal reversed the decision of the trial court and remanded the matter back for further proceedings.


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