Court Holds That Affordable Housing In Lieu Fees Must be Reasonably Related To The "Deleterious Impact" Caused By New Market Rate Housing

In Building Industry Association of Central California v. City of Patterson, a decision modified and ordered published on March 2, 2009, the California Court of Appeal for the Fifth Appellate District has made it clear that, in order to meet statutory and constitutional takings principles, affordable housing in-lieu fees must have a reasonable relationship between the amount of the fee imposed and the deleterious public impact caused by the development - the new market rate housing.

The City of Patterson approved a development agreement and tentative subdivision maps for two residential subdivisions in the City, at which time, the City allowed developers to pay a fee of $734 per home in lieu of constructing affordable housing. The development agreement acknowledged that the City was in the process of updating its affordable housing in lieu fee, and the developer agreed that it would comply with the updated fee if "reasonably justified." Three years later, the City raised the affordable housing in lieu fee to $20,934 per home, which the developer challenged as not reasonably justified.

In ruling in favor of the developer, the Court of Appeal concluded that the term "reasonably justified" incorporated legal standards generally applicable to such fees. The Court noted that the evidence showed that the City appeared to have established the in lieu fee by dividing the projected cost, approximately $73.5 million, of developing the City's share of the regional affordable housing needs, 642 affordable units, by the then total number of unentitled housing units in the City, with the result being a per unit fee of $20,946.

The Court concluded that the new in lieu fee violated established statutory and constitutional principles because there was no showing of a reasonable relationship between the amount of the fee and the deleterious public impact of the to be constructed market rate units. Specifically, the Court stated, "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. Accordingly, the fee calculations described in the Fee Justification Study ... do not support a finding that the fees to be borne by Developer's project bore any reasonable relationship to any deleterious impact associated with the project."

Although decided in the context of the language of the development agreement, the Court's reasoning, based on existing statutory and constitutional law, makes the opinion applicable whenever a city or county seeks to impose affordable housing conditions. Thus, the Patterson decision provides a powerful new tool for developers to use in challenging affordable housing in lieu fees. Even for fees that are established legislatively and applied using a formulaic methodology, cities or counties must show that the fees are reasonably related to impacts being created by the new market rate development rather than calculated based solely on the cost of providing a certain level of affordable housing in a particular jurisdiction or region.

Cox, Castle & Nicholson LLP represented the California Building Industry Association (CBIA) and the Building Industry Legal Defense (BILD) Foundation before the Court of Appeal in seeking to have the Patterson decision published in the Official Reports. By deciding to publish the decision, the Court of Appeal has permitted the Patterson case to be cited to courts throughout California.