Two recent decisions by the California Courts of Appeal cast considerable uncertainty over how CEQA should be applied to local agencies’ real estate agreements for the use and disposition of property. In Concerned McCloud Citizens v. McCloud Community Services District (Jan. 2, 2007) 147 Cal.App.4th 181, the third appellate district held that a local agency may enter into a development agreement without applying CEQA, so long as the terms of the development were not yet finalized, and would be subject to future analysis and approval. However, in Save Tara v. City of West Hollywood (Feb. 21, 2007) 147 Cal.App.4th 1091, the second appellate district held otherwise, requiring CEQA to be applied during the planning stages of a project even before the development agreement itself is approved.
As a result of these decisions, it is unclear when local agencies mush begin applying CEQA to redevelopment projects, public works projects, and similar developments. In light of this uncertainty, special care should be taken by cities, redevelopment agencies, and other local agencies when negotiating and finalizing development projects. For developers and private sector parties involved in a redevelopment project or similar public project, ensuring that responsible agencies implement CEQA review at the proper stage of the project is also essential to ensure that future CEQA-based challenges will not stop the project.
Cities, redevelopment agencies, and other local agencies commonly control the development, use, and redevelopment of land by entering into agreements with developers, property owners, and businesses which impose requirements on the land in exchange for benefits to the owner. For example, redevelopment agencies may utilize disposition and development agreements (“DDA’s”) when selling property to a developer, the terms of which require the developer to make particular improvements or establish uses on the property which eliminate blight in the community. Similarly, through the use of owner participation agreements (“OPA’s”), purchase-sale agreements, and leases, redevelopment agencies can impose contractual requirements of property owners which eliminate blight or advance a public good.
Such agreements often trigger the California Environmental Quality Act (Public Resources Code § 21000, et seq.; “CEQA”). Under CEQA, an agency must consider the environmental effects of a project before it grants approval. However, a key question often overlooked by local agencies when planning such projects is when CEQA must first be applied. For example, due to the need for open dialog and the exchange of design ideas, it is common for agencies to invest substantial amounts of time working with developers on site layout, planning, configuration, project theme, design, and other elements of a project long before the project is ever presented for formal agency approval. During this process, the agency might wish to defer CEQA analysis until the project scope has been determined so that greater control over final design is achieved.
Similarly, agreements for large projects may leave many details of a project open for future determination, since market forces or planning needs may change after the project is first approved. An agreement for a multi-tiered project, for example, may expressly provide that certain phases will be designed and approved in future separate sub-agreements. Agencies might believe that “global” elements of the project may be approved without CEQA review, so long as CEQA is applied to each of the future sub-agreements as they are finalized.
These situations may pose problems for agencies under CEQA, which requires that environmental review be undertaken “as early in the planning process as possible to enable environmental considerations to influence project, program or design.” 14 Cal. Code of Regs § 15013. Since CEQA is intended to be applied early-on to affect project design, it may be improper for agencies to defer CEQA analysis until after the key elements of the project have already been determined.
The recent cases, Concerned McCloud Citizens v. McCloud Community Services District (Jan. 2, 2007) 147 Cal.App.4th 181 and Save Tara v. City of West Hollywood (Feb. 21, 2007) 147 Cal.App.4th 1091, make it difficult to determine how CEQA should be applied by agencies in those instances.
In Concerned McCloud Citizens, the court decided a CEQA challenge to an agency’s agreement with Nestle for future sale of spring water and development of a water bottling facility. In approving the agreement with Nestle, the agency did not apply CEQA, although the agreement itself provides numerous terms for the financing of facilities, volumes of water to be sold, and related details of the project. The agency relied on a section of the agreement which expressly stated that each parties’ obligations were “conditioned on [the agency] and [Nestle] completing…proceedings under CEQA for the Project….” Thus, the agency argued that CEQA compliance could be deferred until the details of the project were finalized according to the agreement’s terms.
While the plaintiffs argued that such deferral violated CEQA’s requirement that environmental review be applied “as early in the planning process as possible,” the third appellate district disagreed. The court held that CEQA could be deferred until further details of the project were determined, such as final design for facilities, facility locations, and similar project elements. Such elements would be reviewed in conjunction with Nestle’s applications for permits and entitlements, and need not be reviewed in connection with the agency’s approval of the agreement.
This result provides flexibility for agencies, allowing them to finalize agreements with developers and property owners while deferring actual CEQA review to later stages, when actual permit applications are filed for development. In addition, this result allows agencies to “lock in” their agreement over key terms for a project without having to apply CEQA, leaving the “details” open for future discussion and CEQA review.
Unfortunately, this result was contradicted by the holding in Save Tara v. City of West Hollywood, in which the second appellate district held that CEQA could not be deferred to later stages of a project. The agency in Save Tara negotiated a DDA that provided for the future design and construction of a residential project. The DDA provided various requirements for the project, including design details, configuration requirements, and similar elements. But, as in Concerned McCloud Citizens, the DDA expressly provided that final project elements were subject to CEQA approval and the discretionary approvals required through the entitlement process. As such, the agency believed that CEQA need not be applied when approving the DDA, but could be deferred in connection with future review of entitlements for the project.
The court disagreed, holding that the agency’s approval of the DDA committed it to a course of action (development of the project) without allowing for public input and review required under CEQA. The court held that deferring CEQA to the entitlement stage of the project was improper because CEQA must be applied “as early in the planning process as possible” so that public input and consideration of alternatives may be made before the project is approved. Thus, according to the court, even though CEQA would be applied during the entitlement phase of the project, the agency’s approval of the DDA committed it to the project in some form without proper public input or review.
This result is strictly at odds with the result in Concerned McCloud Citizens, and significantly undercuts agencies’ flexibility in forming projects. Under Save Tara, an agency cannot easily “lock in” key deal terms on a project, but must apply CEQA to determine which terms are acceptable before committing to them with a developer. It is likely that such restrictions would make it extremely difficult and inefficient for agencies to reach workable agreements with developers, as any deal points would be tentative, and the negotiation process itself would be subject to CEQA review and modification.
The differing results in Concerned McCloud Citizens and Save Tara produce a legal paradox ripe for review by the California Supreme Court. In order to give cities, redevelopment agencies, and other local agencies certainty over when CEQA should be applied, these decisions should be appealed to the California Supreme Court for resolution. It is unclear, however, whether the parties in these cases will seeks such appellate review.
In the meantime, agencies and developers should take care in negotiating and approving DDA’s, OPA’s, purchase-sale agreements, leases, and other real property agreements that may trigger CEQA review. To be entirely safe, agencies should apply CEQA before deal terms are even finalized, perhaps even during negotiations with developers and owners.
However, since this will be infeasible in most instances, to the extent possible, agencies should keep deal points to a minimum:
Although these terms make it difficult for agencies to approach their projects with certainty and control, the uncertainty created by the divergent holdings in Concerned McCloud Citizens and Save Tara make these terms necessary to safeguard a project from CEQA challenge.