Court OKs Fee on Builders to Pay for Housing

In a closely watched case, a federal appeals court in San Francisco ruled Wednesday that the city of Sacramento can charge commercial builders additional fees to help pay for low-income housing when their developments bring an influx of new workers.

The decision provides a green light to a number of other cash-strapped California cities, including Los Angeles, that want to institute similar fees.

Land-use experts said the decision is particularly important in an era of limited government resources and will have an impact throughout the western U.S.

“There’s no doubt that cities feel strong pressure to raise revenue and at the moment” imposing such fees is “the path of least resistance,” said UC Berkeley law professor Joseph Sax.

He said the decision was “quite significant” because it allows California cities to raise funds for housing and other needs without raising property taxes--a move severely restricted since 1978 with the passage of Proposition 13.

“We are delighted with the decision,” said Barbara Zeidman, assistant general manager of the Los Angeles Department of Housing Preservation and Production. “We think it will allow the city of Los Angeles to stop bickering and start building.”

Zeidman said city officials have been working with developers and nonprofit housing advocates for 18 months to develop a program to help fund low-income housing through the imposition of commercial building fees. She said Wednesday’s ruling means Los Angeles can move ahead with plans to raise an estimated $18 million a year. Zeidman said she hopes the program can go into effect at the end of February.

But attorney Edward J. Connor Jr., who represented a developers’ organization challenging the Sacramento ordinance, attacked the decision and said his clients will ask for a rehearing and if necessary take the case to the U.S. Supreme Court.

He said that if the decision were carried to its logical conclusion, it would be used “to justify any kind of ordinance to hit people who are developing property.”

Wednesday’s 2-1 decision stemmed from the controversy generated by the Sacramento City Council’s creation of a Housing Trust Fund Ordinance in March, 1989.

The law requires builders of a variety of non-residential properties to pay fees ranging from 25 cents to 95 cents a square foot to assist in the financing of new low-income housing needed as a consequence of commercial development.

The underpinning of the ordinance was a finding by a Sacramento city task force that non-residential development is “a major factor in attracting new employees to the region” and the influx of new employees “creates a need for additional housing in the city.”

The Commercial Builders of Northern California challenged the ordinance in federal court in Sacramento. The builders argued that the fee program constituted an unlawful taking of their property in violation of the U.S. Constitution.

Federal Judge Edward J. Garcia rejected that argument and his ruling was upheld by the U.S. 9th Circuit Court of Appeals.

The appeals court ruled that Sacramento’s ordinance “substantially advanced” the city’s legitimate interest in expanding low-income housing.

“It was enacted after a careful study revealed the amount of low-income housing that would be necessary as a direct result of the influx of workers that would be associated with the new non-residential development,” said Appeals Court Judge Mary M. Schroeder in her majority opinion.

Sacramento projected that the ordinance would raise about $3.6 million annually, about 9% of the $42 million estimated for the housing. Additional money is supposed to come from other sources, such as bonds and general revenues.

Schroeder said that Sacramento’s ordinance complied with the requirements of a 1987 Supreme Court decision holding that such an ordinance must demonstrate that there is a clear connection between land-use restrictions and the purpose behind them. Judge John T. Noonan Jr. joined in the majority opinion.

The decision emphasized that Sacramento had conducted a detailed study that showed the relationship between new office development and an influx of low-income workers who would require housing.

Appeals Court Judge Robert J. Beezer issued a blistering dissent.

“The ordinance is nothing more than a convenient way to fund a system of transfer payments,” Beezer wrote. He said the city had failed to demonstrate a cause-and-effect relationship between commercial development and housing needs.

Beezer predicted dire consequences if the decision stands. The judge said that workers attracted by new developments will increase the demand not only for housing, but also for all manner of goods and services. If Wednesday’s decision stands, he said, then “we can be expected next to uphold (fees) imposed on developers to subsidize small business, retailers, child-care programs, food services and health-care delivery systems.”

But attorney Marc B. Mihaly, who represented Sacramento in the case, hailed the decision as one that would benefit California and eight other Western states that are within the jurisdiction of the 9th Circuit.

“Every major city in the West where there has been rapid office growth has had to confront the burden of a new working population,” Mihaly said.

“The 9th Circuit is upholding government’s power to address social problems with flexibility--using fees,” Mihaly said.

Nonprofit facilities such as churches and child-care centers are specifically exempted under the ordinance, and the law has a provision that will allow imposition of fees on other types of structures, such as sports stadiums, that were not covered by the 1989 ordinance.