A development agreement between San Luis Obispo County and the developer of a subdivision and resort did not amount to an unconstitutional contracting away of the county's police power, the Second District Court of Appeal has ruled.

The opinion validates development agreements as legitimate planning tools and appears to erase any lingering doubts about the constitutionality of the practice. Although conflicts over development agreements are common, there is little case law directly addressing the state law that permits local governments to sign such contracts.

"It's the first case to directly hold that the development agreement statute does not permit an unconstitutional contracting of local governments' police power," said Stephen Kostka, the developer's attorney. "That's a question that gets raised often in litigation. … This is something I've probably litigated about a dozen times, but it has never risen to the level of a published appellate court decision before now."

The homeowners group that challenged the development agreement in San Luis Obispo County hopes that decision does not stand. Santa Margarita Area Residents Together (SMART) has filed a petition with the state Supreme Court because the Second District not only validated the development agreement but took the county's action one step further, according to attorney Alexander Henson of the Environmental Defense Center.

"The court of appeals decision is horrible," Henson said. "It misstates the record and creates a type of project approval that can commit a public agency to a density and an intensity of land use without any environmental review."

The conflict centers on the Santa Margarita Ranch, which covers 13,800 acres in San Luis Obispo County. After the developer, Santa Margarita Limited, sued the county regarding the number of legal parcels, representatives of the developer, the county and SMART mediated their differences. The end result was a 1997 development agreement outlining permissible land uses for the ranch: development of 1,800 acres for 550 housing units, a golf course, lodge and equestrian center; 8,400 acres of permanent open space; and 3,600 acres protected by 40-year Williamson Act contracts. The development agreement essentially froze the new land use designations in the Salinas River Area Plan, which the county adopted to accommodate the project before signing the development agreement. The agreement called for the developer to follow up with a specific plan, a vesting tentative map, an environmental impact report and a second development agreement. This process was unusual. More often, the county would sign a development agreement at the same time as, or after, it approved the general plan amendment and entitlements.

SMART then filed a lawsuit contending that the agreement was invalid because it covered the planning stage of development before any structures were designed or approved. In other words, the group argued that the development agreement was signed too early in the process. The group also argued that the zoning freeze was an unconstitutional contracting of the county's power to police land use. San Luis Obispo County Superior Court Judge Barry Hammer ruled for the county. A unanimous three-judge panel of the Second District, Division Six, upheld the decision and awarded attorneys fees to the developer.

The appellate court said that SMART interpreted the development agreement statute (Gov. Code §65864 et seq.) too narrowly. "It should be construed to allow development agreements as soon as the government and developer are required to make significant financial and personnel commitments to a project," Justice Steven Perren wrote for the court. The statute does not require project approval to occur at any particular stage, and the statute expressly contemplates discretionary approvals after the agreement is signed, the court ruled.

While recognizing the development agreement contemplated further government approvals, the court also held that the county's adoption of the development agreement amounted to approval of an actual project. "While further agreement and discretionary approvals are necessary, every approval or denial permitted by the Agreement is designed to advance the project in accordance with the standards for Ranch development adopted by the County in the Salinas River Area Plan," Perren wrote.

Interestingly, neither side had argued that signing the development agreement itself was tantamount to project approval, which would require environmental review. The county declared the development agreement categorically exempt from the California Environmental Quality Act and postponed environmental review until a specific plan was prepared. SMART did not challenge the categorical exemption.

As for the question of the county surrendering police power, the court found that case law "supports the conclusion that the Agreement, as well as the Development Agreement Statute, satisfy all constitutional mandates concerning a city or county's exercise of its regulatory authority." Among the cases the court cited were: Morrison Homes Corp. v. City of Pleasanton, (1976) 58 CalApp.3d 724; Avco Community Developers Inc. v. South Coast Regional Com., (1976) 17 Cal.3d 785; and Alameda County Land Use Assn., v. City of Hayward, (1995) 38 Cal. App.4th 1716. The court concluded that San Luis Obispo County's zoning freeze on the Santa Margarita Ranch was not a surrender of police power.

"The Project must be developed in accordance with the County's general plan, and the Agreement does not permit construction until the County has approved detailed building plans. … The County concluded that the zoning freeze in the Agreement advances the public interest by preserving future options. This type of action by the County is more accurately described as a legitimate exercise of governmental police power in the public interest than as a surrender of police power to a special interest," Perren wrote.

The state Supreme Court has not yet decided on SMART's petition for hearing. Kostka, the developer's attorney, said he doubted the state's high court would accept the case because there is no conflict among the appellate districts. But SMART attorney Henson said the court could be interested in development agreements as regulatory tools and in the issue of contracting away police power.


The Case:
Santa Margarita Area Residents Together v. San Luis Obispo County Board of Supervisors, No. B136088, 00 C.D.O.S. 8467, 2000 Daily Journal D.A.R. 11269, filed October 18, 2000.

The Lawyers:
For SMART: Alexander Henson, Environmental Defense Center, (805) 781-9932.
For the county: Timothy McNulty, deputy county counsel, (805) 781-5400.
For Santa Margarita Ranch Limited: Stephen Kostka, McCutchen, Doyle, Brown & Eneresen, (925) 937-8000.