Builder gets a legal boost against city's affordable-housing law

State Supreme Court lets Sterling Park build condominium project while challenging Palo Alto's requirement for BMR housing

Seven years after Sterling Park received Palo Alto's blessing to construct a condominium complex on West Bayshore Road, the project remains in legal limbo, with the developer and the city clashing over affordable housing.

But thanks to a recent ruling from California's highest court, Sterling Park can proceed with the project even as it continues to challenge Palo Alto's requirements that it devote 10 units of the 96-condominium project to below-market-rate housing and contribute funds toward the city's affordable-housing program.

The October ruling from the state Supreme Court reversed two prior rulings from the Superior Court and the state Court of Appeals, both of which sided with the city. The two courts had concurred that Sterling Park cannot challenge the conditions of approval laid out in its 2007 agreement with the city because the 90-day statute of limitation had long expired. Sterling Park first challenged the city's affordable-housing requirement in 2009, long after the City Council and the various land-use boards gave the project the green light.

The Supreme Court saw things differently and concluded that Sterling Park could indeed proceed with its legal challenge because of a separate law that allows developers to contest mitigation fees. Unlike the other two courts, the Supreme Court decided that the dispute between Palo Alto and Sterling Park should not be subject to the 90-day rule and should instead be governed by the Mitigation Fee Act. The law allows a developer to pay fees under protest and then seek reimbursement.

Under this act, the statute of limitations doesn't kick in until after the city notifies the developer of the fees owed and the right to protest. In this case, Sterling Park claimed it never received such a notice and the time limits thus don't apply.

City Attorney Molly Stump did not return a request for comment.

The crux of the disagreement between the highest court and the two lower ones comes down to one vague word: "exaction." The Mitigation Fee Act specifically states, "Any party on whom a fee, tax, assessment, dedication, reservation, or other exaction has been imposed, the payment or performance of which is required to obtain governmental approval of a development ... or development project, may protest the establishment or imposition of the fee, tax, assessment, dedication, reservation or other exaction" as provided in the statute.

The fees developers usually have to provide include funds to support parks, libraries and other infrastructure or defray some of the cost of the new development to the city.

But what exactly is an "exaction?" Depends on which court you consult. The lower courts relied in their rulings on a prior case, Trinity Park vs. the City of Sunnyvale, in which the courts wrestled with the word "exaction" before concluding that the fees in the Mitigation Fee Act should be limited to those imposed for the purpose of "defraying all or a portion of the cost of public facilities related to the development project" or, as the Supreme Court stated in a different ruling, to "alleviate the effects of development on the community."

Using the Trinity Park logic, the lower courts in the Sterling Park case concluded that affordable-housing requirements don't count.

In its July 2012 ruling, the Sixth District Court of Appeals noted that "one purpose of the BMR housing program is to improve air quality and reduce demand on regional transportation infrastructure by insuring (sic) that people of all economic levels can afford to live and work within the city limits rather than commute."

"This has nothing to do with defraying the cost of public facilities necessitated by the new development itself," appeals court Justice Eugine M. Premo wrote in the opinion, which concluded that since the Mitigation Fee Act should not apply, Sterling Park's challenge should be subject to the regular 90-day period, effectively making it moot.

Not so, argued the Supreme Court. Even though the affordable-housing fees are different from the other mitigations listed in the statute, they fall under the general category of "other exactions."

The court in the Trinity Park case "erred in interpreting the term 'other exactions' so narrowly," Justice Ming Chin wrote in the Supreme Court's ruling.

In rejecting the Trinity Park case, the Supreme Court relied on two other cases (Williams Communications v. City of Riverside; and Fogarty vs. City of Chico), which have a broader definition of "exaction." In these cases, the term applies to actions that "divest the developer of money or possessory interest in property," with less regard to whether the contested fees defray the cost of the development.

The Supreme Court noted that under the faulty logic in the Trinity Park case, the Mitigation Fee Act would "only govern fees that are related to the project but arguably excessive; it would not govern fees or other exactions that are blatantly arbitrary and unlawful."

The city's argument that the 90-day statute of limitation had expired would make sense, the Supreme Court noted, if the disagreement revolved around a condition such as the number of units allowed. It wouldn't make sense, it argued, for the developer to proceed with construction of units that are under dispute while protesting the city's failure to approve them. Obviously, Chin wrote, "one cannot build a project now and litigate later how many units the project can contain – or how large each unit can be, or the validity of other use restrictions a local entity might impose."

"But the validity of monetary exactions, or requirements that the developer later set aside a certain number of units to be sold below market value, can be litigated while the project is getting built," Chin wrote.

The Supreme Court did not make any findings about the merits of Sterling Park's challenge, but merely concluded that the Mitigation Fee Act applies to the challenge. The decision means the case will now return to the appeals court.


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Posted by Tomas
a resident of Midtown
on Nov 25, 2013 at 5:10 pm

Good ruling. Enough BMR housing here in P.A. Also, I never voted on the City paying so much$$$ into providing low cost housing. How about lowering utility taxes, property taxes, other city taxes so we(the supposed middle class) can still hold onto our houses and live here.

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Posted by enniac
a resident of Green Acres
on Nov 25, 2013 at 6:16 pm

The case was waged based on the how the BMR units are regarded under the law, not the law providing for BMR set asides.

Something is not right here, though. The article says it's a 96-unit condo complex and only 10 units are BMR. The BMR set aside is 15-20%, or 14-19 BMR units, not 10.

Is the builder taking advantage of bonus density laws that allow builders to exceed zoning if they include an affordable component? If so, the City should dispute the number of units because the builder clearly does not feel it needs to provide these units. The City can later exact the in lieu fee for those units. Oh, wait, the City never met an overdevelopment it didn't want to roll over for. So it will probably let the builder get away with the densification anyway, even though he may never provide the BMR units.

A year ago, I would have disagreed with you, but after witnessing the arbitrary and expensive way affordable housing is developed here (to assuage some rich people's white guilt rather than to best provide for the neediest among us), I am more inclined to see things your way.

Unfortunately, your vote doesn't seem to count much, and our City is using regional rules (where they do have some discretion) to claim they have no choice.

Like this comment
Posted by Wondering?
a resident of Another Palo Alto neighborhood
on Nov 25, 2013 at 6:32 pm

> and our City is using regional rules

Wondering what regional rules you might be talking about?

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Posted by enniac
a resident of Green Acres
on Nov 25, 2013 at 11:14 pm

State density bonus laws provide discretion when there are safety issues, etc., they do not automatically have to be granted. The City tends to all apply the bonus to a number that is higher than what the general plan would actually call for, i.e., they always apply the highest in a range even if not appropriate. Also, the City tends to blame ABAG and Plan Bay Area housing allotments even to excuse wiping away existing affordable housing to get new market-rate units (with a few affordable housing units) to meet that allotment.

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Posted by Ugliest Building
a resident of Downtown North
on Nov 26, 2013 at 8:17 am

@enniac The developer paid some in-lieu fees to reduce the number of actual units required. Then City Manager Frank Bennest was building his war chest to buy the property at Ole's on Alma so the City could build the ugliest building in Palo Alto.

The costs to taxpayers for the few affordable units are extraordinarily high!

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Posted by Raymond
a resident of East Palo Alto
on Nov 26, 2013 at 11:08 am

[Post removed.]

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Posted by j99
a resident of Barron Park
on Nov 26, 2013 at 12:03 pm

[Post removed.]

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Posted by resident
a resident of College Terrace
on Nov 26, 2013 at 12:40 pm

[Post removed.]

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Posted by Robert
a resident of another community
on Nov 26, 2013 at 12:50 pm

And another slew of self righteous comments from Palo Altans who I'm SURE are themselves paying property taxes on the full values of their homes, in no way being subsidized by someone else.

Like this comment
Posted by Wondering?
a resident of Another Palo Alto neighborhood
on Nov 26, 2013 at 1:22 pm

> And another slew of self righteous comments from Palo Altans who
> I'm SURE are themselves paying property taxes on the full values
> of their homes, in no way being subsidized by someone else.

People who have lived in Palo Alto for more than twenty-five years are doubtless paying about 8-10 times less than those who have moved into town within the past ten years, or so. So--Prop.13 does create a property tax differential that might be construed as a subsidy, by some.

Mortgage payment deductions on income taxes also represent help to property owners--in terms of lower income taxes. Perhaps this can be considered as a subsidy--or maybe an incentive to purchase a home.

Before we can really begin to talk about subsidies, it might pay for those who are angered by Palo Altans views to at least provide us some insight into how much of the GDP he/she thinks government has a right to take from those who are actually working. Right now, when all taxes are considered, the total statutory taxes for working, property-owning, people is about 65% of their income. Is that enough, or too little?

There really is only so much wealth to redistribute. Once the government has taken what you've earned--then it's gone. All gone!

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Posted by Robert
a resident of another community
on Nov 26, 2013 at 1:33 pm

@Wondering, that is an interesting rhetorical question, though personally whatever the rate is, I feel it should be the same for everyone. I am bothered that as a working, property-owning person I am paying more in property taxes than many homeowners who have home values 10x my own, while receiving the same level of city services as them; most people would view this as a subsidy. For myself, and other people in my generation, we did not have the option to purchase a home in the 60's and 70's, when housing prices were more in line with incomes.

Like this comment
Posted by Wondering?
a resident of Another Palo Alto neighborhood
on Nov 26, 2013 at 2:02 pm

> whatever the rate is, I feel it should be the same for everyone

The property tax rates in California are the same for everyone. The assessments are not. Since the actual tax is a combination of the rate and the assessment--there are staggering differences between property taxes paid between properties.

And keep in mind that people who don't own property are not contributing the same percentage of their incomes as those who do own properties--while obtaining, more-or-less, the same services.

And these days--about 50% of the peope in the country are no longer paying income taxes. When one takes a long, hard, look at who's paying the bills these days--it's difficult to wax enthusiatically about more publicly-subsidized housing.

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Posted by Robert
a resident of another community
on Nov 26, 2013 at 2:09 pm

I stand corrected, I feel it should be the same rate, and on the same assessed value across the board. Renters would still be contributing to the system as the landlords wouldn't be exempt from property taxes. That being said, I'm quite against any kind of subsidized housing, as well as other interferences with the housing market. Unaffordable housing especially in this area, is due to a severe lack of supply caused by such interferences.

Like this comment
Posted by enniac
a resident of Green Acres
on Nov 26, 2013 at 5:24 pm

As someone who commuted from cheaper parts of the Bay Area for decades before moving here, and who, after paying mortgage (which was for a long time a usurous interest only), taxes (that are about 20 times my next door neighbors'), insurance, and other home expenses, lives on less discretionary income than families who qualify for even low-income units in Palo Alto, and has no money for luxuries like smart phones and smart phone service, cable TV, car payments, and travel to see family, I am really troubled by the heavy-handed guilt-inducing tactics of those who push "affordable housing" in this area.

I want to see us provide it, I am just tired of being treated like some kind of overprivileged piggybank just because I live here, and I want to be able to ensure affordable housing is done well without being beaten with the NIMBY stick when it isn't.

I am very concerned about the implications of this lawsuit, because it's bad enough that the City uses a little bit of affordable housing to justify ignoring the comprehensive plan, quality of life, safety, congestion, pollution, destroying open space, etc, but it brings up the spectre of developers getting away with all of the negatives and being able to weasel out of paying the mitigations (such as they are) later.

Sorry, but further commenting on this topic has been closed.

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