Use of redevelopment funds by a city-formed nonprofit organization to develop school administrative buildings and a housing project with units reserved for low- and very low-income residents was valid and did not require voter approval, the Second District Court of Appeal has ruled. 

In reaching its decision, the court had to interpret the various restrictions in redevelopment law as well as Article 34 of the state constitution.  

Article 34 as part of the California Constitution, adopted by voters in 1950, had the effect of requiring voter approval of "low rent housing projects." Over time, the Legislature has codified various interpretations of Article 34, excluding from the voter approval process certain types of affordable projects. On a parallel path, the Legislature has modified redevelopment law to ensure that cities spend a certain amount of their tax increments on affordable housing. 

Against that legal background, the City of Cerritos, its redevelopment agency, the ABC Unified School District, and a nonprofit public benefit corporation formed by the city, entered into a complex financing and development agreement to develop a 247-unit senior housing project. Under that agreement, the school district would lease the site of its administrative facilities to the redevelopment agency. The agency in turn would transfer its lease interest to the nonprofit corporation. The agency would clear the property, guarantee the sublease, and finance the construction of the senior apartments. The agency would invest about $81 million of redevelopment funds designated for low- and moderate-income housing. 

In addition, the city/agency would use about $18.5 million of low/mod housing funds to acquire private property and renovate that property for the district's replacement administrative offices. The various agreements allowed the nonprofit organization and the 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 under Code of Civil Procedure § 860. A validation action essentially seeks a judicial blessing for a government activity. Cerritos Taxpayers Associations (CTA) answered the action and challenged the use of the low- and moderate-income housing funds to develop a non-housing facility (the replacement district offices). Taxpayers also challenged the lack of voter approval under Article 34. The trial court ruled in favor of the agencies. CTA appealed and was joined in its objections to the city's use of housing funds by the Western Center on Law and Poverty (WCLP).

As to the use of low/moderate housing funds for replacement offices, the Second District Court of Appeal concluded the redevelopment statutes were not as narrowly drawn as urged by CTA and WCLP. While the redevelopment law contains limitations (for example, offsite infrastructure funded with low/mod housing money must be a "reasonable and fundamental component of the housing units") the overall statutory scheme is sufficiently broad to allow expenditure on the district administrative buildings as part of a plan to generate the senior housing project. In other words, the court found a nexus between the non-residential investment and the housing 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 34 argument. Of the project's 247 units, 25 units were restricted to households of very low income, and 15 units were restricted to low-income residents. Health and Safety Code §§ 37000-37002 exempt from voter approval projects that are privately owned and which have less than 49 percent low-income residents. Plantiffs argued that the project was not privately owned because it would be developed by the city-formed nonprofit public benefit corporation. The court disagreed, finding the corporation was a separate legal entity. That characterization as a separate entity was not lost simply because the nonprofit corporation was formed by the city and the city would have continuing involvement, the court ruled.

In early Proposition 13 cases (Rider v. County of San Diego, (1991) 1 Cal.4th 1, and Rider v. City of San Diego, (1998) 18 Cal.4th 1035) courts had frowned on local government's use of alter egos to skirt constitutional restrictions. However, the Second District panel in the Cerritos case declined to follow the alter ego argument. 

Cerritos further argued that the project was exempt from the voter-approval requirement because the percentage of low- and very low-income units was too small to trigger Article 34. But the appellate court did not reach that issue, because it was satisfied that the project met the private ownership test.

CTA also argued that the school district failed to follow government code provisions on the disposition of surplus lands, that the redevelopment agency failed to provide supporting information for a resolution authorizing property acquisition with tax increment funds, and that the same people could not legally sit on the City Council, the redevelopment agency board and the nonprofit corporation board. The appellate court rejected all of the contentions. 

The Case:

City of Cerritos v. Cerritos Taxpayers Association, No. B214530, 2010 DJDAR 5923.

Filed April 20, 2010

The Lawyers:

For the city: Dan Slater, Rutan & Tucker, (714) 641-5100. 

For ABC Unified School District: Constance J. Schwindt, Atkinson, Andelson, Loya, Ruud & Romo, (562) 653-3200. 

For Cerritos Taxpayers Association: Timothy Quick, (562) 799-6020.