Developers Lose Challenge to Annexation Fees
Real estate developers are painfully aware of various types of fees imposed by local agencies as a condition for permitting development projects.
A pair of opinions published by California’s Sixth Appellate District — Award Homes, Inc. v. County of San Benito and BMC Promise Way, LLC v. County of San Benito (orders for publication here and here) — affirmed the City of Hollister’s imposition of annexation-related fees on residential development projects.
Both cases featured similar factual backdrops and similar holdings.
The tax sharing agreement between the city and county imposing annexation fees
The City of Hollister and the County of San Benito entered into a tax sharing agreement, under which the city would pay the county a fixed fee per residential unit constructed on land annexed into the city from the county. The agreement’s stated intent was that “any annexation and development of residential property shall be fiscally neutral to the City and County.”
Under the agreement, the city was required to pay the county $7,000 (adjusted annually based on CPI) for each single family dwelling unit ultimately created, and the payment became due when the city issued a building permit for each home. The fee amount was later increased to $9,500 per unit, and the payment became due upon the city signing off on a final occupancy permit for any home.
The annexation and development agreements
The developers entered into agreements with the city.
In the Award Homes case, the developer and city entered into a development agreement. The agreement required the developer to satisfy “Developer’s obligations” in the tax sharing agreement between the city and county, but did not define what was meant by “Developer’s obligations.”
In the BMC Promise Way case, the developer’s predecessor entered into an annexation agreement with the city. The agreement required the developer to hold and use the property “in compliance with all applicable provisions of the … Tax Sharing Agreement” between the city and county, including the fee payment provisions. The agreement was expressly binding on successors and assigns.
The conditions for approval
In the Award Homes case, the city conditioned approval of the tentative tract map for the project on the developer’s agreement that the “fees required under the [Tax Sharing Agreement] shall be paid with each building permit.” The condition of approval specifically referred to the “Developer’s obligations” section of the development agreement as the source of this obligation.
In the BMC Promise Way case, one of the city’s conditions for approval of the tentative subdivision map for one portion of the project stated that the project was “subject to the terms and conditions set forth in the annexation agreement….” In a condition for approval of a different portion of the project, the city required the developer to “pay all fees including all fees required by reimbursable agreements….”
The developers sued, challenging the city’s attempts to impose the tax sharing annexation fees on them.
Holdings: developers must pay annexation fees
In both cases, the court held in favor of the city and against the developers.
The developers argued that the tax sharing agreement between the city and county had expired after the annexations had occurred but before construction, and therefore all obligations created by the agreement had “dissolved.” The court rejected this argument, holding that the payment obligation was created at the time of annexation, although the payment wouldn’t be due until the later construction and issuance of permits.
Further, the court noted, the “fiscal neutrality goal” of the tax sharing agreement would “not be served” by the developers’ interpretation because “it would create an incentive to delay development of annexed property to evade the requirement to pay” the amounts due under the tax sharing agreement.
The court also rejected the developers’ arguments based on the language of the annexation/development agreements and the conditions for approval. While seemingly acknowledging that the language in those documents was not crystal clear, the court held that the “reasonable” interpretation favored the city. The court also noted the purpose of the annexation and development agreements: to “ensure that the proposed development pays its own way and eliminates or minimizes the financial burden on City services and facilities created by development….”
Lesson
Annexation fees are just one of many species of fees imposed by local agencies on developers. Unless the language of the governing documents clearly shows that fees are not supported, courts are likely to enforce them.