The California Supreme Court Sets New Rules For Determining When Preliminary Agreements For Development Projects Require Environmental Impact Review

The California Supreme Court has issued its fourth California Environmental Quality Act decision this year, and the decision includes new rules for determining when preliminary agreements for development require environmental impact review under CEQA. The various holdings in the decision are critically important to local governments and the real estate industry, because various types of agreements are often critical preliminary steps in the real estate development process, particularly in the context of public/private partnerships, redevelopment projects, and affordable housing projects.

The Court's decision in Save Tara v City of West Hollywood evaluated city agreements designed to facilitate an affordable senior housing project proposed by two nonprofit community housing developers. In 2003, the city granted the developers an option to purchase the property, allowing them to demonstrate control of the property to the U.S. Department of Housing and Community Development. HUD approved a grant in 2003. In 2004, the city approved and then revised a "conditional agreement for conveyance and development of property" to facilitate the project. This agreement included provisions for a million-dollar city loan to the developers and beginning the process of relocating the tenants on the property. The agreement stated that it was subject to the city's approval of land use entitlements for the project, and compliance with the environmental impact review requirements of CEQA.

Save Tara argued that this agreement constituted city approval of a specifically defined project, such that CEQA review was required before the agreement could be approved, and the city and developers countered that no CEQA review was required because the project was expressly made contingent on CEQA review. The Supreme Court found that, based on the agreements as well as the surrounding circumstances, the city had effectively approved the project "in substance", although it reserved some design details for future decision-making.

In reaching this conclusion, and considering the competing arguments, the Supreme Court declined to issue a bright-line rule governing such preliminary agreements. Instead, the Court formulated the following general test: 

"A CEQA compliance condition can be a legitimate ingredient in a preliminary public-private agreement for exploration of a proposed project, but if the agreement, viewed in light of all the surrounding circumstances, commits the public agency as a practical matter to a project, the simple insertion of a CEQA compliance condition will not save the agreement from being considered an approval requiring prior environmental review."

In fleshing out this general rule, the Court reviewed some of the prior case law concerning various types of preliminary agreements. The Court cited with approval a case called Stand Tall on Principles, which involved a school district's agreement to purchase property contingent on CEQA review; the court noted that such purchases "as a practical matter in a competitive real estate market, may sometimes need to be initiated before completing CEQA analysis." The Court also cited the Concerned McCloud Citizens case where a court of appeal upheld a water district's agreement to sell water for bottling, because there was no approval of the bottling plant in question and because that bottling plant project had not yet been specifically formulated and was subject to both discretionary permits and CEQA review. The Court did not extend those cases to adopt a bright-line rule allowing agreements contingent on later CEQA review, but the court also rejected Save Tara's argument that any conditional or unconditional agreement should be considered "approval" of a project triggering CEQA review.

Given that the Court did not set a bright-line rule, how can developers, local governments, and redevelopment agencies determine what agreements require CEQA review, and which do not require such review? Unfortunately, under the general test formulated by the court, this will become something of a case-by-base determination. There are several statements and holdings in the decision, however, which offer some guidance:

• In this particular case, part of the city's loan to the developer was not conditioned on CEQA compliance, and the city would not be repaid if it did not approve the project. The city also proceeded with tenant relocation, a step the Court characterized as significant and likely irreversible. Together with city announcements that the project was going forward, these circumstances showed in effect that the city's approval of the project was not really contingent on CEQA review.
• The agreements also did not fully preserve the city's discretion. The city required CEQA to be "satisfied" but it was not clear the city retained discretion to deny the project based on its environmental impacts once the CEQA review was complete.
• In response to briefing from the League of Cities, the Court also noted that preliminary agreements such as "purchase option agreements, memoranda of understanding, exclusive negotiating agreements, or other arrangements with potential developers" may not trigger the expensive EIR process. "CEQA review was not intended to be only an afterthought to project approval, but neither was it intended to place unneeded obstacles in the path of project formulation and development."

Developers and public agencies will need to carefully consider these points in structuring the various types of preliminary agreements that are so often utilized in the development process, particularly the more complex arrangements that are often needed for public-private projects, redevelopment and reuse projects, and affordable housing projects. 

If you have questions regarding the implications of this decision, please contact  Michael Zischke at 415.262.5109 or by email at mzischke@coxcastle.com