By William W. Abbott

As a black-mark on the history of progressive thought in California, the voters, in 1950, enacted Article XXXIV as part of the California Constitution. It had the effect of requiring voter approval of low rent housing projects. Over time, the legislature had codified various interpretations, excluding from the voter approval process, certain types of affordable projects. On a parallel path, the legislature has modified the redevelopment law to ensure that there are minimum expenditures for affordable housing. After all, how many automalls, big box retailers and movie theaters does California really need to fund through the redevelopment process?

With that as background, The City of Cerritos, its redevelopment agency (“Agency”), a local school district (“District”) and a nonprofit public benefit corporation, formed by the City, entered into a complex financing and development agreement to develop a senior housing project. The School district leased its administrative facilities to the Agency. The Agency in turn would transfer its lease interest to the non profit. The Agency would clear the property, guarantee the sublease, and finance the construction of the senior apartments. The Agency’s investment in the project approximated $81,000,000. The City/Agency would use its low and moderate income housing funds to acquire private property and renovate the property for the District’s replacement administrative offices. The City/Agency investment on behalf of the School District was approximately $18,500,000. The various agreements allowed the non profit and School District to acquire their respective sites, which in fact transpired.

As a legal insurance policy, the City, Agency, and District brought a validation action (Code of Civil Procedure section 860). A taxpayers group answered, and challenged the use of the low and moderate income housing funds to develop a non housing facility (the replace District offices), as well as the lack of voter approval (Article XXXIV). The trial court ruled in favor of the agencies. Taxpayers appealed, and were joined in their arguments on the use of housing funds by the Western Center on Law and Poverty.

As to the use of low and moderate income housing funds for replacement offices, the appellate court concluded the redevelopment law statutes were not as narrowly drawn as urged by Taxpayers and Western Center. While the redevelopment law had various limitations (such as offsite infrastructure had to part of the construction of residential units and a “reasonable and fundamental component of the housing units”), the overall statutory scheme was sufficient broad to allow expenditure in the District administrative buildings as part of a plan to generate the seniors project. In other words, the court found nexus between the non residential investment and the seniors’ project. The non residential investment supported the legislative purpose of increasing the supply of affordable housing.

The taxpayer group did not fare any better with respect to its Article XXXIV argument. The project consisted of 247 units. 25 units were restricted to households of very low income, and 15 units were restricted to low income. Applicable exemption language (Health and Safety Code sections 37000-37002) exempts from voter approval project which are privately owned, and which have less than 49 percent low income residents. The appellate court rejected the argument that the city formed non-profit public benefit corporation failed the private ownership test. The corporation was a separate legal entity, and that characterization was not lost simply because it was city formed and that the city would have continuing involvement. Although earlier courts had alluded to an alter-ego theory in early proposition 13 cases (Rider v. County of San Diego (1996) 1 Cal.4th 1 and Rider v. City of San Diego (1998) 18 Cal.4th 1035), the appellate court in Cerritos declined to follow the alter-ego argument. Although the Agency argued that the project was exempt from voter approval by virtue that the percentages of low and lower income units were to low to trigger voter approval, the appellate court did not have to reach that issue as it was satisfied that the project met the private ownership test.  City of Cerritos v. Cerritos Taxpayers Association 

The Taxpayers remaining challenges (District failure to follow the Government code provisions disposition of surplus lands, Agency’s alleged failure to provide supporting information for resolution authorizing property acquisition with increment funds and incompatibility of offices) were similarly rejected by the appellate court.

William W. Abbott is a partner at Abbott & Kindermann, LLP. For questions relating to this article or any other California land use, real estate, environmental and/or planning issues contact Abbott & Kindermann, LLP at (916) 456-9595.

The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, LLP, nor the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues.