In Building Industry Ass'n of Central California v. City of Patterson, No. F054785 (Cal. Ct. App. Mar. 2, 2009), the California District Court of Appeal held that the city could not increase an in-lieu affordable housing exaction from $734 to $21,000 per house, because it failed to show the increase was attributable to the development.
The City of Patterson entered into a development agreement with the landowner in which the city agreed the owner would pay only those affordable housing fees in effect at the time the agreement was executed. The agreement recognized, however, that the exaction may be increased and that the city was preparing an "updated analysis." The owner agreed to pay the revised exaction, provided it was "reasonably justified." Predictably, the city revisited the exaction schedule and after study that changed the methodology of calculating the fee, revised it to $20,946 per market rate unit. After the owner sued, the trial court held the new methodology used by the city to calculate the new exaction was reasonable, and ruled the owner must pay the increased exaction.
The court of appeal noted "the critical question in this appeal is whether the increased fee complied with the terms of the Development Agreement." Slip op. at 9. The court rejected the owner's assertion the "reasonably justified" language prohibited the city from changing its method of calculating the affordable housing fee since the owner acknowledged the city was preparing an "updated analysis" which did not limit the city to any particular methodology.
The court turned next to the issue of the meaning of "reasonably justified." The owner argued this term incorporated existing law and that any increase must conform to the law governing exactions, while the city asserted it in effect waived applicable law. The court sided with the owner, holding:
Here, we conclude 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. In other words, part of the way one would show a fee is reasonably justified is to show that it does not violate established legal principles. The contrary interpretation, which would conclude that the term did away with applicable legal requirements, would create much greater change in the relationship between the parties. An objectively reasonable person would expect more explicit language to implement such a change. Thus, it is too great a leap to infer that the term "reasonably justified" demonstrates an intention to waive applicable legal requirements.
Slip op. at 12. The court applied California's law of exactions, which requires a "reasonable relationship" between the amount of the fee and the burdens on public facilities attributable to the development. The court concluded the city's fee increase was not reasonably related to the need for affordable housing generated by the owner's project. Slip op. at 13. The study conducted by the city did not justify the increase since it did not calculate the fee based upon the project's creation of the need for affordable housing:
Instead, the Fee Justification Study shows that the affordable housing in-lieu fee of $20,946 per market rate unit was calculated based on an estimate of City's need for 642 units of affordable housing. 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 generated by new market rate development. Accordingly, the fee calculations described in the Fee Justification Study and Moran's declaration do not support a finding that the fees to be borne by Developer's project reflected the costs attributable to it.
Slip op. at 14.