Property rights advocates won a potentially far-reaching victory with a First District Court of Appeals ruling regarding San Francisco's hotel conversion ordinance. In a takings lawsuit filed by a hotel owner, the court held that the "heightened scrutiny" test applies to the San Francisco law, meaning there must be a close relationship between the exaction and the project's impact. The court ruled that the lawsuit filed by owners of the San Remo Hotel should proceed in trial court. The hotel owners argued that the city's hotel conversion ordinance (HCO) violates state and federal constitutional provisions against taking private property without just compensation. San Francisco's ordinance prohibits the conversion of residential units to tourist use unless the hotel owner replaces the converted units with new affordable housing or pays a substantial mitigation fee. The city has successfully defended the 21-year-old law against repeated legal challenges, but that track record could change. Under the heightened scrutiny test, the city must show both an "essential nexus" between the permit conditions and the impact of the proposed development, and a "rough proportionality" between the exaction and the development's effects. "If the trial court has to apply the heightened scrutiny test to this exaction, the city loses," predicted Andrew Zacks, attorney for the San Remo Hotel owners. "I think the ordinance is in trouble and this case could be the death knell for it. … We think the law ultimately is going to be declared facially invalid." Deputy City Attorney Andrew Schwartz agreed that the heightened scrutiny test would mean trouble, but he argued that court precedent indicates the test should not apply here. "Legislative land-use regulations of general application are to be reviewed in the political process, not in the courts," Schwartz said. He noted the state Supreme Court reached that conclusion last year in a rent control case, Santa Monica Beach Ltd. v Superior Court (1999) 19 Cal.4th 952 (see CP&DR Legal Digest, February 1999). But the court held that San Francisco's regulation is discretionary and not of general application because it applies only to residential hotels, of which the city has about 500. "I think this decision is potentially far-reaching. It would shift policy-making decisions for land use to the courts," Schwartz added. "This decision is a prescription for a very activist court." In response to an affordable housing shortage, the city began regulating the conversion of residential hotels to tourist use in 1979. At that time, the 62-unit San Remo was classified as a residential hotel based on a survey of the hotel operator. The hotel owners, Thomas and Robert Field, dispute that contention, saying they have always provided the majority of rooms to tourists. When the Fields sought permission to provide all rooms to tourists, the city required them to pay a $567,000 conversion fee — equal to $9,000 per room, or 40% of replacement costs — and to offer lifetime leases to long-term tenants. In 1996, the hotel owners paid the fee in protest and sued the city in federal court alleging violations of federal civil rights law, 42 U.S.C. 1983. But the Ninth Circuit Court of Appeals kicked the case over to state court. San Remo Hotel v. City and County of San Francisco (9th Cir. 1998) 145 F3d 1095 (San Remo I); see CP&DR Legal Digest, July 1998. The San Francisco Superior Court sustained numerous demurrers from the city. On appeal, however, the First District, Division Five, ruled that the hotel owners should be allowed to proceed with the case at the trial court level. The Fields challenged both the hotel conversion ordinance itself and the city's application of it to the San Remo. They contended the law does not substantially advance legitimate government interests as required by the Fifth Amendment and that the law forces a small group of property owners to "bear the full cost of providing a general public benefit." Those arguments found favor with the unanimous three-judge appellate panel. Importantly, the court ruled that San Francisco's exaction is discretionary, as were those in Nollan/Dolan. The court specifically rejected the city's argument that the hotel conversion law is a zoning regulation of general application. "The $567,000 mitigation fee obviously was not imposed on every other property in the City," Justice Lawrence Stevens wrote. "Consequently, a heightened level of scrutiny is proper because this is the type of particularized governmental exaction imposed upon a property owner which was seen in Ehrlich." In, Ehrlich v. City of Culver City (1996) 12 Cal.4th 854, the state Supreme Court held that exactions must meet the Nollan/Dolan "essential nexus" and "rough proportionality" standards only when they are imposed ad-hoc on a specific project. Justice Stevens wrote: "The 1990 version of the HCO [hotel conversion ordinance] explicitly states that it demands increased fees from property owners, since other official sources of public funding for low-cost housing became more difficult for the City to procure, thereby shifting the burden of public funding for low-cost housing to the property owner. This is potentially the type of individual taking of property by the government, for an asserted public purpose, which the jurisprudence developed under the takings clause was designed to protect citizens against, and for which heightened scrutiny is appropriate." "We recognize that the HCO may be a well-intentioned measure intended to aid persons on limited incomes by providing affordable housing, but even well-intentioned measures may create unconstitutional takings," Stevens continued. Interestingly, the Fifth District's ruling came only four months after U.S. Supreme Court Justice Antonin Scalia called San Francisco's hotel conversion ordinance extortionate. Scalia argued, but failed, for the high court to take a different case challenging the law (see CP&DR Legal Digest, May 2000). In a written dissent from the court's denial of certiorari, Scalia questioned whether the state appellate court was willing to follow the Nollan/Dolan precedent. Zacks, the San Remo attorney, called Scalia's dissent "an invitation" for the First District to rule as it did. The Case: San Remo Hotel v. City and County of San Francisco, No. A083530, 00 C.D.O.S. 6609, 2000 Daily Journal D.A.R. 8745, filed August 8, 2000. The Lawyers: For San Remo: Andrew Zacks, (415) 956-8100. For San Francisco: Andrew W. Schwartz, deputy city attorney, (415) 554-4620.