In its first takings case decision in three years, the state Supreme Court has upheld a San Francisco law that regulates the conversion of residential hotel rooms to tourist use. In a 4-3 decision based largely on its 1996 Ehrlich decision, the court ruled that exactions that are part of a broad plan deserve deferential review, while ad hoc exactions are subject to much closer court scrutiny.

The state's high court overturned a First District Court of Appeal ruling for the owners of the San Remo Hotel, who argued that the hotel conversion ordinance (HCO) itself and the city's application of the ordinance to their property violated state constitutional protections against uncompensated takings.

In the majority opinion, Justice Kathryn Mickle Werdegar wrote, "The HCO applies to all property in the class logically subject to its strictures, that is, to all residential hotel units; no more can rationally be demanded of local land use legislation in order to qualify for deferential review."

Local government officials and planners were watching the case closely to see whether the state's high court would apply the "heightened scrutiny" standard established in the Nollan and Dolan line of cases to the San Francisco law. The appellate court said that the trial court, which had originally ruled for the city, should have used the heightened scrutiny standard, which requires a close relationship between the exaction and the project's impact. The city argued for a deferential standard, under which a court could strike down a law only if it were arbitrary. The state's high court agreed.

"Extending Nollan and Dolan generally to all government fees affecting property value or development would open to searching judicial scrutiny the wisdom of myriad government economic regulations, a task the courts have been loath to undertake pursuant to either the takings or due process clause," Werdegar wrote.

"The majority opinion maintains the status quo," said state Deputy Attorney General Daniel Siegel, who filed an amicus brief on behalf of San Francisco. "The Court of Appeal decision altered the status quo by expanding the application of heightened scrutiny. The [Supreme] Court brought the law back to where it was."

Deputy City Attorney Andrew Schwartz argued that the hotel conversion ordinance is a policy issue for the elected Board of Supervisors, not for the courts.

The state Supreme Court decision "is important for all California, and to the extent that the California Supreme Court is a leader nationally, it is important across the country," Schwartz said. "It upholds the validity of development impact fees that public agencies across the country rely on … to mitigate the impacts of new development."

But Paul Utrecht, who helped represent the hotel owners, said the decision is another indication that the state Supreme Court "has no patience" for takings law. "Except for Ehrlich, every takings case that has come across their desk has gone for the government," Utrecht said.

The controversy over San Francisco's regulation of residential hotels extends back to the late 1970s, when a shortage of affordable housing became acute. In 1981, the city adopted a hotel conversion ordinance (HCO) — which the city amended in 1990 — that prohibited the conversion of residential units to tourist use unless hotel owners replaced the converted units with new affordable housing or paid a mitigation fee.

When the ordinance first took effect, the San Remo was classified as a 62-unit residential hotel based on a survey of the hotel operator. The hotel owners, Thomas and Robert Field, later disputed that classification, saying they always provided a majority of rooms to tourists. City officials refused to budge and said the Field brothers would have to pay $567,000 — equal to $9,000 per room, or 40% of replacement costs — to convert the hotel to tourist use. In 1996, the owners paid the fee in protest and then filed suit in federal court, alleging violations of federal civil rights law, 42 U.S.C. 1983. A federal appellate court moved the case 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 ruled that the hotel owners should be allowed to proceed with the case at the trial court level. The city appealed that decision to the state Supreme Court.

The court first tackled the question of whether the hotel owners even needed a conditional use permit for the conversion. Without getting into how many units were actually rented to "tourists" for fewer than 32 consecutive days and how many were rented to "residents" for longer stays, the court said the proposal to convert the hotel to full tourist use triggered the need for a use permit. Citing the city's Planning Code, Werdegar wrote, "A permitted conditional use may continue ‘in the form in which it lawfully existed,' but ‘may not be significantly altered, enlarged or intensified, except upon approval of a new conditional use application.' Clearly, a change from partial tourist use to complete tourist use would be a significant alteration or enlargement of the existing use, requiring a new conditional use permit."

Then Werdegar reached the key issue: Is the city's ordinance subject to heightened scrutiny? The U.S. Supreme Court in Nollan v. California Coastal Comm'n, (1987) 483 U.S. 825, ruled that there must be a "substantial nexus" between an exaction and a project. In Dolan v. City of Tigard, (1994) 512 U.S. 374, the U.S. Supreme Court ruled that an exaction must be roughly proportionate to a project's impact. In 1996, the state Supreme Court applied the Nollan and Dolan case law in Ehrlich v. City of Culver City, (1996) 12 Cal.4th 854. In Ehrlich, the state Supreme Court ruled that Culver City's exaction of $280,000 in recreation mitigation fees from a developer who proposed building condominiums on the site of a defunct private tennis club was subject to "substantial nexus" and "rough proportionality" standards, and that the exaction failed to pass those tests.

But, Werdegar wrote, the San Remo case was different from Ehrlich, where "the condition was imposed ad hoc, entirely at the discretion of the city council and staff."

"The HCO is generally applicable legislation in that it applies, without discretion or discrimination, to every residential hotel in the city," wrote Werdegar, who picked apart the lower court's analysis. "In suggesting that an ordinance, to be considered generally applicable, must apply to ‘every other property in the city,' the Court of Appeal invoked an impossible standard, one that would be met by almost no rationally drawn land use regulation."

The court then considered the hotel owners' claims that the hotel conversion ordinance itself was invalid and that the city's application of the ordinance to the project was illegal. The court sided with the city in both instances.

"Plaintiffs fail to demonstrate from the face of the ordinance that fees assessed under the HCO bear no reasonable relationship to housing loss in the generality or great majority of cases, the minimum showing we have required for a facial challenge to the constitutionality of a statute," Werdegar wrote.

Chief Justice Ronald George and Justices Joyce Kennard and Carlos Moreno (in his first land use case) joined Werdegar's opinion.

In a concurring and dissenting opinion joined by Justice Ming Chin, Justice Marvin Baxter agreed with the majority's ruling regarding the inapplicability of heightened scrutiny. However, he wrote, the court should have set a clearer standard that considers the "cause-and-effect relationship between the owner's desired use of the property and the social evil that the fee seeks to remedy." Baxter also wrote that the court should have remanded the case so that the trial court could apply the proper standard to the takings claims, and to determine the exact number of hotel units at issue.

Justice Janice Rogers Brown submitted a dissenting opinion in which she appeared to question most land use regulations. "San Francisco has implemented a neo-feudal regime where the nominal owner of property must use that property according to the preferences of the majorities that prevail in the political process — or, worse, — the political powerbrokers who often control the government independently of majoritarian preferences."

"The government, in effect, says: We have the power; therefore, pay us to leave you alone," Brown continued. "By any measure, that is extortion. Moreover, it turns the takings clause on its head. Instead of the government having to pay compensation to property owners, the government now wants property owners to compensate it to get back the fair value of property the government took away through regulation."

Hotel owners' attorney Utrecht said Brown "got it totally right." But the city's Schwartz said Brown holds an ideological viewpoint that "departs from all established law."


The Case:
San Remo Hotel LP v. City and County of San Francisco, No. S091757, 02 C.D.O.S. 2048, 2002 DJDAR 2463. Filed March 4, 2002.

The Lawyers:
For San Remo: Andrew Zacks and Paul Utrecht, (415) 956-8100.
For San Francisco: Andrew W. Schwartz, deputy city attorney, (415) 554-4620.