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Apartment and Condo Developers in California Take Note: Court Clarifies Calculation of School Impact Fees

Under California’s Education Code (section 17620), a school district can levy a fee on new residential construction for the purpose of funding new or improved school facilities to help meet the demand created by the new development.

Government Code section 65995(b)(1) calculates the applicable fee as $1.93 per square foot of assessable space.  “Assessable space,” in turn, is defined as: “all of the square footage within the perimeter of a residential structure, not including any carport, covered or uncovered walkway, garage, overhang, patio, enclosed patio, detached accessory structure, or similar area.”

How does this statute apply to a new apartment building with interior space outside of the individual apartment units, such as interior hallways, storage rooms, and fitness centers?  A recent opinion from California’s Fourth Appellate District — 1901 First Street Owner, LLC v. Tustin Unified School District — provides guidance.

Facts and trial court judgment

The developer — 1901 First Street Owner, LLC  (“First Street”) — built a five-story apartment building in the City of Santa Ana. Before obtaining building permits, First Street was required to pay a school impact fee to the Tustin Unified School District.

First Street submitted a worksheet to the City’s building department.  (Section 65995 provides that the square footage calculations required by the statute shall be performed by the building department of the city or county that issued the building permit for the development.)  The worksheet calculated the square footage using a “net rentable” method, which was the City’s standard practice at that time.  That method calculated the square footage of the individual apartment units, but excluded everything else in the building.  The City accepted First Street’s calculations (totaling 272,943 square feet of residential space) and informed the School District.

The School District objected to the calculations because they did not include “all of the square footage within the perimeter of the residential structure” as required by Government Code section 65995(b)(1).  After some administrative proceedings, the City decided to abandon its “net rentable” method and revised the square footage calculation for the project to include everything within the perimeter of the building, resulting in an increase of 70,000 square feet, which increased the impact fee by $238,549.86.

First Street paid the increased fee under protest and, after exhausting its administrative remedies, sued the School District.

The trial court ruled in favor of the School District, and First Street appealed.

Court of Appeal’s opinion

The Court of Appeal affirmed the trial court’s judgment.

Looking to the statutory language of section 65995(b)(1), the court noted that the “definition of ‘assessable space’ begins with the perimeter of a residential structure.”  (Emphasis original.)  The court continued:

If we were to stop there and consider only the plain language of the statute, interior common area clearly constitutes assessable space.  The only way this interpretation could be avoided would be to conclude that residential ‘structure’ refers to an individual apartment unit.  But that would be an extremely strained interpretation of the word ‘structure.’

The court also noted that the statute applies on its face to both new construction and the reconstruction of an “existing building” for residential use, and that the use of the word “building” cut against the notion that the “structure” containing the “assessable space” could be simply an individual apartment unit.

The court then rejected a string of First Street’s arguments:

  • First Street pointed to a different statute, section 65995.5, which provides an alternative method for calculating school impact fees for anticipated future development based on the projected square footage “of residential units.”  But the court noted that the alternative method permitted by section 65995.5 was not used here, and was not required to be used.
  • First Street argued that the interior areas of its apartment building fit within the spirit of the exceptions to section 65995 (walkways, garages, etc.)  But the court observed that the exceptions did not mention interior common areas frequently found in large apartment buildings, such as mechanical rooms, storage rooms, fitness centers, common lounge areas, recreation rooms, indoor pools, and elevator shafts.
  • As to the exception to assessable space for “walkways,” the court acknowledge the term could be used in different ways, but held that section 65995 “uses it in the sense of an external walking path” and not an interior hallway.  The court noted that the other items in the list of exceptions are all typically located at or near the periphery of a residential structure, and could arguably be included within the perimeter, so it made sense for the Legislature to clarify that it did not mean to include those items within the definition of assessable space. Interpreting “walkways” as external walking paths was more consistent with the overall list of exceptions.
  • Last, First Street argued that the court should have enforced the City’s “standard practice” of using the “net rentable” method of calculating assessable space, and that the City’s decision to change that method violated First Street’s vested rights arising from the approval of its tentative map and execution of its development agreement.  But the court held that the City’s “standard practice” violated section 65995, and the City was therefore justified in adopting a new rule consistent with the statute.  As to vested rights, the court held that under section 66498.6(b), the approval of a tentative vesting map “does not grant local agencies the option to disregard any state or federal laws, regulations, or policies.”  First Street’s development agreement likewise expressly reserved to the City the power to enact rules after the agreement’s effective date to comply with the law.

Lesson

Residential developers constructing apartment buildings, condominiums, or townhomes now have greater clarity regarding the school impact fees they are likely to pay.  Under the First Street opinion, if the fees are calculated under Government Code section 65995, then “assessable space” will include the interior common areas.

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