Court Confirms That Calculation of Level 1 Developer Fees for Apartment Buildings Includes Interior Common Areas

April 2018
Number 16

A California court has confirmed that school districts are authorized to assess Level 1 developer fees against interior common areas of apartment buildings, including hallways and walkways.

School districts have received pushback from developers regarding whether “assessable space” includes interior common areas. With its decision in 1901 First Street Owner, LLC v. Tustin Unified School District, the court has provided districts with legal authority for imposing fees on such space. The court expressly concluded that its analysis is specific to Level 1 developer fees, and not Level 2 or 3 developer fees, which receive separate statutory treatment in the Government Code.

Developer Fees in California Law

School districts are authorized to levy developer fees against residential construction within their boundaries to fund school facilities. Level 1 fees are charged per square foot of “assessable space,” including “all of the square footage within the perimeter of a residential structure.” (Gov. Code, § 65995.) The building department of the city or county issuing the building permit for residential construction is required to calculate Level 1 fees.

Background

In 1901 First Street Owner, LLC v. Tustin Unified School District, a developer of a residential apartment building challenged the city’s calculation of Level 1 developer fees to be paid to the Tustin Unified School District. The city excluded interior common areas from its initial fee calculation, but recalculated the fees when the District objected. The developer objected to this later fee calculation and filed suit.

The developer argued that only individual apartment units, and not interior common areas-including hallways, storage rooms, mechanical rooms, fitness centers, and lounges-could constitute “assessable space . . . within the perimeter of a residential structure” within the meaning of Government Code section 65995(b)(1). The developer relied on section 65995’s indication that a city or county should calculate the space within the perimeter of a structure based on the city’s or county’s “standard practice” for calculating perimeters, and claimed that the city was correct in excluding interior common areas in its calculation. Thus, the developer contended that the calculation of Level 1 fees should exclude interior common areas. The district disputed such exclusion, taking the position that that the city’s calculation correctly assessed the interior common areas along with the individual apartment units.

The court agreed with the district and confirmed that “assessable space” includes interior common areas. The court noted that the statute explicitly lists examples of exterior areas and notably excludes interior common areas from the list. Aside from walkways, the exterior areas listed were typically located at or near the periphery of a residential structure. Therefore, a “walkway” under the statute means an internal walkway and not an interior hallway.

Additionally, the court distinguished the meaning of “standard practice” under Government Code section 65995(b)(1) from the developer’s argument that the city’s “standard practice” was to exclude interior common areas from the calculation. The court stated that, under the statute, “standard practice” meant the city’s calculation of square footage “within the perimeter of a residential structure,” including interior common areas.

Takeaways

In an environment where courts have issued several developer-friendly decisions in recent years, this case can be viewed as good news for school districts. The results of 1901 First Street confirm the position taken by many of our school district clients that interior common areas are properly included in the calculation of Level 1 fees.

As of January 24, 2018, school districts may charge up to $3.79 per square foot of residential development. School districts should ensure that cities calculate Level 1 fees based on the square footage of both individual apartment units and interior common areas.

Lozano Smith’s Developer Fee Handbook addresses imposition of developer fees and related procedures. School districts that have not previously ordered the Handbook or need replacement or additional copies can order the Handbook here or by contacting Client Services at clientservices@lozanosmith.comor (800) 445-9430.

If you have any questions about the court’s ruling or about developer fees in general, please contact the authors of this Client News brief or an attorney at one of our eight offices located statewide. You can also visit our website, follow us on Facebook or Twitter or download our Client News Brief App.

Written by:

Kelly M. Rem

Partner

Lauren Kawano

Associate

©2017 Lozano Smith

As the information contained herein is necessarily general, its application to a particular set of facts and circumstances may vary. For this reason, this News Brief does not constitute legal advice. We recommend that you consult with your counsel prior to acting on the information contained herein.

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New Law Eases Path to School Employee Housing

February 2018
Number 5

As a result of California’s affordable housing crisis, school districts face challenges in retaining teachers and school district employees, particularly in regions with high housing costs. California lawmakers sought to address the problem by proposing Assembly Bill (AB) 1157 and AB 45 to make it easier for districts to promote housing development for district employees, though Governor Jerry Brown vetoed the latter bill.

AB 1157 was part of a package of 15 housing bills approved by lawmakers that became effective on January 1, 2018. ( See 2017 Client News Brief No. 81.) While most of the bills were not focused specifically on school employee housing issues, they have the potential to substantially impact school districts by creating an influx of new students.

AB 1157: School Surplus Property Use for Teacher Housing

Effective January 1, 2018, AB 1157 exempts school districts from the requirement that they establish a property advisory committee to consider declaring property surplus if the district intends to use the surplus property for employee rental housing. Education Code sections 17388 and 17391 require the governing board of a school district to appoint a school district advisory committee (commonly known as a “7-11 Committee” for the number of positions on the committee) prior to the sale, lease, or rental of surplus real property, with limited exceptions. AB 1157 adds language to Education Code section 17391 to create an exception to this requirement for the sale, lease, or rental of real property that is to be used for teacher or district employee housing.

This new law also provides that school or community college district property used for teacher or district employee rental housing are tax exempt.

AB 1157 also adds language to Education Code section 17456 regarding the financing of school district employee housing projects. That statute exempts certain sale/saleback and lease/leaseback property transactions from the full surplus property process, including notice and offer requirements and either competitive bidding or a waiver of the bidding requirement from the State Board of Education, so long as proceeds from the transaction are used for construction, reconstruction, or renovation of school facilities or to acquire property for use as a school site. The statute now also specifies that “the construction, reconstruction, or renovation of rental housing facilities for school district employees” is a permissible capital outlay expenditure.

The express legislative intent behind AB 1157 was to exempt school district property to be used for teacher or district employee housing from the surplus property process. According to the author of the bill, such housing serves an “educational purpose,” and is therefore not surplus property. It seems that by adding language regarding employee housing projects to a statute that already exempted certain transactions from the surplus property process, the bill’s author intended to exempt employee housing projects from that entire process. It is unclear, however, whether the revised statute as written provides a blanket exemption for all school district employee housing projects regardless of the type of transaction or financing mechanism employed, or if some employee housing projects may be ineligible for the exemption.

AB 45: California School Employee Housing Assistance Grant Program

AB 45 would have created a $25 million fund for school district employee housing development, but the bill was vetoed by Governor Brown. In his veto message, the Governor noted that he recently signed Senate Bill (SB) 2, which made funds available for local government planning purposes. Rather than creating a new housing program with AB 45, the Governor concluded that districts could work with local governments and the California Housing Financing Authority to maximize funding from SB 2. Unfortunately, this makes local school districts more reliant on other local agencies to achieve funding support for employee housing projects, when those other agencies may be competing for the same dollars.

2017 Housing Bill Package: School Districts May Feel Impacts

The package of housing bills approved by lawmakers in 2017 will make it more difficult for local public agencies to say no to housing projects and will streamline review of certain types of housing development, limiting public input in the approval process. Many school districts attempt to address overcrowding concerns during California Environmental Quality Act (CEQA) review of development projects. Now, the time in which to address school capacity concerns or even the opportunity to do so will be curtailed.

School districts should be prepared to engage in further advance planning to address capacity issues and should stay informed about housing development proposals within their boundaries. The earlier an affected district gets involved in the process, the better prepared the district will be to handle capacity issues and to address the impact of development with the city or county and the developer. Additionally, if housing does create a rapid influx of students, districts may have to engage in school facility planning earlier than in the past.

School districts that qualify for Level 2 developer fees may need to be prepared to review and update their School Facility Needs Analysis (SFNA) more than once per year in order to keep pace with the impacts of the expedited housing bills.

Takeaways

While AB 1157 was intended to streamline the process for approval of employee housing projects, a host of challenges await school districts seeking to embark on such projects. Challenges include collective bargaining implications, tax consequences, and local government oversight. In light of the possible ambiguity in the new law and the aforementioned challenges, school districts may wish to consult with their legal counsel before embarking on employee housing. Lozano Smith has an Employee Housing Working Group, and is ready to assist with these complex considerations.

With the Legislature back in session, lawmakers are proposing new housing bills that could further alter the local development landscape. Lozano Smith will be closely watching the progress of these bills in the event that any become law.

For more information on how school districts can prepare for the effects of these new laws, please contact an attorney at one of our eight offices located statewide. You can also visit our website, follow us on Facebook or Twitter or download our Client News Brief App.

Written by:

Harold M. Freiman

Partner

Devon B. Lincoln

Partner

lauren Kawano

Associate

©2017 Lozano Smith

As the information contained herein is necessarily general, its application to a particular set of facts and circumstances may vary. For this reason, this News Brief does not constitute legal advice. We recommend that you consult with your counsel prior to acting on the information contained herein.

State Allocation Board Adopts Developer Fee Increases

February 2018
Number 3

The State Allocation Board (SAB) has increased the amount of “Level 1” developer fees that school districts are authorized to collect to $3.79 per square foot of residential development and $0.61 per square foot of commercial development. The increase takes effect immediately, and may now be implemented by school districts through local action.

The new rates, which the SAB approved on January 24, 2018, represent an 8.78 percent increase over the maximum amounts authorized as of February 2016. The SAB based its increase on the RS Means cost index for Class B construction.

Government Code section 65995 authorizes the SAB to increase the amount of Level 1 developer fees that school districts are authorized to collect. Such an increase may be adopted in every even-numbered year. The SAB increase does not affect “Level 2” developer fees, which a school district must adopt annually based on its own school facilities needs analysis. The change also does not affect “Level 3” fees, which school districts may only collect when the SAB certifies that state funds for new school facility construction are no longer available.

Based on this and other legal developments, Lozano Smith is preparing an update for the firm’s publication, Developer Fee Handbook for School Facilities: A User’s Guide to Qualifying for, Imposing, Increasing, Collecting, Using and Accounting for School Impact Fees in California. The handbook is intended to help school districts reduce their legal costs by providing comprehensive information regarding California law and process for school impact fees. The handbook contains procedures, timelines, checklists, and forms to be used when adopting and implementing fees and/or increases.

Lozano Smith is making the handbook available at a cost of $100 to public school districts that are also clients of Lozano Smith. The handbook will be available to non-client public school districts at a cost of $200. Non-public agencies can purchase the handbook at the full price of $300. Districts wanting a second or replacement copy may request one for $75. School districts may order the handbookhere. For more information on the Developer Fee Handbook, or to order a copy, you may also contact our Client Services department at clientservices@lozanosmith.com or call (800) 445-9430.

If you have any questions regarding the adoption or implementation of fee increases or any other developer fee issue, please contact an attorney at one of our eight offices located statewide. You can also visit our website, follow us on Facebook or Twitter or download our Client News Brief App.

Written by:

Harold M. Freiman

Partner

Kelly M. Rem

Partner

Ellen N. Denham

Associate

©2017 Lozano Smith

As the information contained herein is necessarily general, its application to a particular set of facts and circumstances may vary. For this reason, this News Brief does not constitute legal advice. We recommend that you consult with your counsel prior to acting on the information contained herein.

Tax Bill Eliminates Advance Refunding Opportunities

January 2018
Number 1

On December 22, 2017, President Donald J. Trump signed the Tax Cuts and Jobs Act of 2017, putting into place the most sweeping tax reform seen in three decades, including significant cuts to corporate and individual tax rates. The new law also effectively eliminates a critical tool local agencies have long used to save taxpayers money.

The tax bill eliminated the tax-exempt status of advance refunding bonds, effectively ending their use by local government agencies. Local agencies may still issue them, but the interest is no longer tax exempt for bondholders. The revocation of this long-standing subsidy eliminates a tool that local government agencies, including school and community college districts, have used to restructure existing debt and provide savings to taxpayers.

An advance refunding occurs when issuers replace outstanding bonds with new bonds with a lower interest rate before payment of the original bonds is fully due. Borrowers advance refund their outstanding debt to take advantage of a favorable interest rate environment. Such an approach results not only in a reduction of borrowing costs, but may also free up resources for new projects.

Since 1986, federal tax law has permitted governmental bonds to be advance refunded once. Under the new tax bill, one of the key advantages to advance refundings-tax exempt status- will no longer exist.

Lozano Smith has expertise in public finance matters, serving as bond counsel on more than $1 billion in school district and community college district bond issues. Lozano Smith will be conducting school bond workshops across the state, covering topics that include:

  • Elections: Timelines and requirements
  • Bonds: Types, validity and tax treatment
  • Roles and Responsibilities: Committees, consultants, and counsel
  • Disclosure and Record Keeping: Regulations and legal considerations
  • Statewide Bond: Matching and impact

If you have any questions regarding the tax bill’s impact on your agency, please contact an attorney at one of our eight offices located statewide. You can also visit our website, follow us on Facebook or Twitter or download our Client News Brief App.

Written by:

©2017 Lozano Smith

As the information contained herein is necessarily general, its application to a particular set of facts and circumstances may vary. For this reason, this News Brief does not constitute legal advice. We recommend that you consult with your counsel prior to acting on the information contained herein.

School District Bid Threshold Raised for 2018

December 2017
Number 85

School districts’ bid threshold for purchases of equipment, materials, supplies and services (except construction services) has been adjusted to $90,200, effective January 1, 2018. This represents an increase of 2.20 percent over the 2017 bid limit. The notice may be viewed here.

Under Public Contract Code section 20111(a), school districts must competitively bid contracts over the bid limit and award to the lowest responsible bidder, unless an exception applies. Contracts for amounts that fall under the bid limit may be awarded without competitive bidding.

The California Community Colleges Chancellor’s Office is expected to announce a similar adjustment to the bid threshold for community college districts’ purchases of equipment, materials, supplies and services except construction services, pursuant to Public Contract Code section 20651(a), sometime in the next few days. Once released, that information will be available here.

The bid limit for construction projects remains at $15,000.

The bid thresholds for cities, counties and special districts are not affected by the bid limits discussed here.

For more information on the new bid limits or bidding in general, please contact an attorney at one of our eight offices located statewide. You can also visit our website, follow us on Facebook or Twitter or download our Client News Brief App.

Written by:

Ruth E. Mendyk

Partner

Michael Dunne

Paralegal

©2017 Lozano Smith

As the information contained herein is necessarily general, its application to a particular set of facts and circumstances may vary. For this reason, this News Brief does not constitute legal advice. We recommend that you consult with your counsel prior to acting on the information contained herein.

New Law Squeezes Local Ballot Measures for Bonds

December 2017
Number 82

A significant new law will require local public agencies to include additional information in summary statements for local ballot measures that raise taxes, including school district general obligation bond measures. Assembly Bill (AB) 195 will amend section 13119 of the Elections Code by requiring summary statements for all local ballot measures that impose or raise a tax to include the amount of money the tax will raise annually and the rate and duration of the tax to be levied. The new law goes into effect on January 1, 2018, and affects measures already approved for an election to be held after that date.

This requirement will apply to all local tax measures, whether submitted to the voters by a local governing body such as a school district governing board or City Council or by citizens through the initiative process. In addition to general obligation bonds, AB 195 also applies to local sales and parcel tax measures.

According to its author, AB 195 was meant to fix a drafting error in an earlier ballot transparency bill, AB 809 (2015), which was intended to apply to all local measures but was found by a court to apply to citizen-backed initiatives only.

As a result of AB 195, the precious real estate of the summary statement, which is limited to 75 words, becomes less available as an opportunity to meaningfully communicate the purposes and works that will be funded by the taxes.

The new law could also pose compliance challenges for local agencies seeking to place bond measures on the ballot. Unlike a parcel tax measure, for which both the rate and duration of the resulting tax are ascertainable on Election Day, bond issues are subject to market forces that can make this information difficult to predict. While it would be possible to estimate tax rate and duration based on an estimated first series of bonds, because of future market conditions, changes in assessed value, construction costs, time of issuance, and size of issuance, efforts to quantify the rate and duration of a tax to fund anything beyond is extremely challenging. Public agencies will need to work closely with their bond counsel and consultants to address these and other issues raised by AB 195.

Lozano Smith has expertise in public finance matters, serving as bond counsel on more than $1 billion in school district and community college district bond issues. Lozano Smith will be conducting School Bond Workshops across the state, covering topics that include:

  • Elections: Timelines and requirements
  • Bonds: Types, validity and tax treatment
  • Roles and Responsibilities: Committees, consultants, and counsel
  • Disclosure and Record-keeping: Regulations and legal considerations
  • Statewide Bond: Matching and impact

If you have any questions regarding the applicability of AB 195 to your measures, compliance with AB 195, or about navigating a future bond campaign, please contact the authors of this Client News Brief or an attorney at one of our eight offices located statewide. You can also visit our website, follow us on Facebook or Twitter or download our Client News Brief App.

Written by:

Daniel Maruccia

Partner

©2017 Lozano Smith

As the information contained herein is necessarily general, its application to a particular set of facts and circumstances may vary. For this reason, this News Brief does not constitute legal advice. We recommend that you consult with your counsel prior to acting on the information contained herein.

New Laws Enhance Role of Student School Board Members

October 2017
Number 63

On September 25, 2017, Governor Jerry Brown signed two bills aimed at giving a stronger voice to student board members of school district governing boards. Assembly Bill 261 confers voting rights upon all student board members, while Senate Bill 468 enhances a student board member’s access to board materials. Both bills go into effect on January 1, 2018.

Assembly Bill 261: Voting Rights for All Student Governing Board Members

Existing law requires the governing board of a school district with one or more high schools, upon the receipt of a pupil petition for pupil representation, to order the inclusion of at least one student board member. The petitioner may request that the board add either a nonvoting student member or a preferential voting student member. Preferential voting rights give a student board member the right to vote on motions before the other board members vote, but the student’s vote is not considered in determining whether a motion passes. Assembly Bill (AB) 261 amends Education Code section 35012, subdivision (d) to provide all student board members preferential voting rights.

The bill maintains the existing requirement that a student board member’s vote be cast before the official vote of the governing board. Even though the student board member’s vote does not count toward the final numerical outcome of the vote, it must be recorded in the meeting minutes. This procedural order is intended to ensure that student board members’ opinions are taken into account before a board vote.

Senate Bill 468: Students to Receive More Timely Access to Board Materials

Senate Bill (SB) 468 amends Education Code section 35012 to require that school districts provide open meeting materials to student board members at the same time as other school board members. The bill also requires school officials to invite student board members to any staff briefings provided to other board members, or to provide a separate staff briefing to student board members within the same time frame as other board members’ briefings. While the changes will provide student members more timely access to information, the bill’s provisions are limited to open meetings and do not provide student members the right to attend closed sessions or receive information related to closed sessions.

Takeaways

These new bills are intended to enhance the role of student school board members. Any school district that has a student board member will be required to grant him or her preferential voting rights and can no longer have student members who are nonvoting. The student board member’s preferential vote must be cast before the official board vote. Any open meeting materials or briefings that are provided to school district board members must also be provided to the student board member in the same time frame.

For more information on AB 261 or SB 468 or on board governance in general, please contact the authors of this Client News Brief or an attorney at one of our eight offices located statewide. You can also visit our website, follow us on Facebook or Twitter or download our Client News Brief App.

Written by:

Harold H. Freiman

Partner

Mark Murray

Associate

©2017 Lozano Smith

As the information contained herein is necessarily general, its application to a particular set of facts and circumstances may vary. For this reason, this News Brief does not constitute legal advice. We recommend that you consult with your counsel prior to acting on the information contained herein.