The Rise of the Development Agreement

From my perspective on the private sector/developer side, development agreements are incredibly useful tools to ensure a project can be built with confidence, but that doesn’t mean I don’t see the peculiarity of the development agreement as a tool for land use control. In fact, the development agreement as a regulating tool is rather odd. They are often critiqued as circumventing the planning process and being undemocratic, and they are hardly the ideal means to achieve land use goals. Yet the development agreement’s proliferation can be traced to a point in time when the public began demanding multiple, often competing goals from financially strapped cities, and developers were seeking guarantees to shield their projects from an often shifting municipal landscape. In the absence of a comprehensive re-evaluation of our goals and policies, development agreements may still represent our best, if not ideal, alternative to get projects done.

The Development Agreement

A development agreement is literally a contract between a local jurisdiction (usually a city) and a property owner (usually a developer).  The agreement sets the standards and conditions that govern the development of the property. It provides certainty to the developer that his or her project will be isolated from changes in the jurisdiction’s zoning laws over the course of development, but it also contracts the developer to provide benefits to the city, such as infrastructure improvements, public open space, or monetary payment into funds, such as “in lieu” fees, in exchange for that certainty.

Of course, those are development agreements as we know them today. Before I delve into a discussion of the critiques of development agreements, it’s important to explore the history of its rise as a land use tool. I recently read a fantastic paper by Professor Daniel Selmi of Loyola Law School in Los Angeles, where he describes the historical rise of the development agreement.

Professor Selmi begins his paper by going back to city planning’s birth, during the Progressive Era when planning was seen as apolitical and experts had great autonomy. Beginning the story of development agreements at that point in time is fine from Selmi’s standpoint as a law professor, as he is setting the foundation for the legal reasoning that led to development agreements, such as Euclid v. Ambler being the seminal case on land use. However, for my purposes here, development agreements didn’t begin to take shape until after World War II.

Expanding and Conflicting Goals

As I wrote in a previous post, "The Fall of Planning Expertise,"planning faced self-inflicted problems in Post-WWII America, such as programs like “urban renewal,” which destroyed entire neighborhoods in the name of economic development. The public began to lose faith in the experts and started to demand more involvement in the planning process. The most visible of this new public involvement are the public hearings that now dominate the planning process. However, as Professor Selmi writes, perhaps the greatest impact the public had on planning during this period was lobbying state governments to pass new laws that created numerous and, often times, conflicting land use goals.

For example, consistency with master plans, conservation of land, transportation management, and housing affordability and construction goals are now required. In relation to “urban renewal,” cities are now required to measure the impact projects might have on the poor—Title VI being an obvious example. Individual projects must now attempt to argue how they help a city meet all of those goals, typically through “Findings”—a list of varying affirmations that a project contributes to land use goals and complies with policies.

Each goal may be reasonable and prudent individually, but as Selmi points out, they nonetheless proved to conflict when required together. For example, we demand walkable neighborhoods and increased transit, yet require wider lanes and hordes of parking because we also demand less congestion. We demand a great deal of affordable housing yet are reluctant to change our neighborhoods to accommodate them under the guise of preservation.

These conflicting goals necessitated, in what I view as a certain kind of irony, the expansion of planning’s discretionary authority over individual projects and, ultimately, more behind-the-counter negotiations between cities and the developers searching for ways to achieve all or most of these new goals.

Property Taxes and Exactions

Cities had been engaging in exactions since the beginning of planning, arguing that developers should pay for improvements necessitated by the additional use from their projects, such as roads and utilities. The Standard Planning and Enabling Act of 1928 required that most utilities for new developments be provided by the developer. But their use was not as prevalent as it they are today.

Local government funding began to decline during the mid-20th century despite the slowly increasing costs, some of which originated from the new land use goals. Nevertheless, neither political leaders nor the public had an appetite to find additional funding, most notably with the passage of California’s Proposition 13 in 1978. Instead of finding new funding, the public demanded that development be required to pay its own way.

Around the 1980s, cities used their expanded authority to exact more fees for other services, such as schools, libraries, parks, transit, social services, etc., requiring developers to pay for responsibilities that had traditionally fallen under the authority of the city. The result was a financial incentive for cities to build.

The courts have upheld the use of exactions in two landmark cases: Nolan v. California Coastal Commission and Dolan v. City of Tigard. Together, these rulings granted cities the right to exact fees and services from property owners without just compensation, but with a caveat: there must be a “rational nexus” between the exaction and the impact caused by development, and the exaction must be proportional to the impact. This is more commonly known as the “Nollan-Dolan Test” and the requirement of the “Nexus Study.”

Nollan-Dolan may be commonplace, but it requires cities to spend significant resources on consultants and studies to justify their exactions. Fees imposed prior to the completion of such studies can be easily challenged.

Because of caps on property taxes and added requirements to exact fees and services from new development projects, Professor Selmi argues that municipalities were open to an alternative, and “a bargained-for agreement with a developer appeared to be a vehicle that could provide just such a solution.”

Vested Rights

Financial insecurity and multiple goals created an environment of private negotiation between developer and city, and we could say that an “agreement on development” was born. However, perhaps the final event that created the modern development agreement was over “vested rights.”

It’s important to remember that zoning ordinances are not contracts. Zoning ordinances can be changed at the will of the governing body, or even by the people of the city through ballot initiatives. Thus, a project that was agreed upon and permitted one year could be required to dramatically change to meet legislation passed another year. “Vested rights” is a legal doctrine establishing when a project would be protected from further actions of the city government, such as changes in the zoning code. The issue is, of course, when does vesting take place?

In 1976, the California Supreme Court case, Avco Community Developers, Inc. v. South Coast Regional Com, held that a developer’s large project did not vest until much later in the process, leaving it open to changes in requirements and other discretionary approvals. Developers were understandably concerned because the rules could be changed mid-project. They needed a way to ensure their projects vested as early as possible but in a manner that was appealing to cities. As the previous section pointed out, this environment already existed.

The modern development agreement legally binds the developer to existing zoning laws (at the time) as well as all conditions of approval, such as exactions. But it also vests their projects at the time of adoption, rather than at a much later time in the development process.

Criticisms

No matter your opinion on development agreements, it’s important to understand how we arrived before we can begin to discuss where we are going. The history leading to the rise of development agreements proves they were a logical outcome given the constraints on cities and burdens on developers. Of course, development agreements are not without criticism.

Undemocratic

Professor Selmi, for example, takes great issue with the introduction of contract law into the public process. As a legal scholar, this introduction would be egregious to Selmi because contract law was never designed to address the relationship between government land use and planning with private developers. Contracts are between two parties and normally kept private. After all, as the public, we are not privy to the contracts engaged between private companies, such as banks. But the two parties in a city-developer relationship are contextually very different than two privately held companies.

As a representative democracy, the city council is a representative for the public at-large. To argue that it is undemocratic that the public on an individual basis is left out of contract negotiations is incorrect. It is the role of the city council to represent public interest in negotiations. To argue for direct democracy—that the public needs to be more involved with the creation of the development agreement—while a perfectly valid opinion, is a fundamentally different argument than one of the costs and benefits of development agreements.

Further, the development agreement is available for public viewing and interested parties may voice their concerns over the agreement and lobby before the city council, just as they would for any project, subject to a development agreement or not. Third parties can also sue to enforce the terms of development agreements if they feel the city has not fulfilled its enforcement duty. Even if we admit that the conditions placed through development agreements are being routinely unmet, that is not a flaw of the development agreement per se. It is more a result of lax of enforcement by the city government, which could be for a myriad of reasons, such as too few code inspectors.

Finally, development agreements (at least in California), must still be consistent with an adopted general plan and are subject to annual review to ensure the terms of the agreement are being met. If not, the city can terminate or modify the agreement (California Government Code § 65865.1 and § 65867.5).

Police Powers

The development agreement also comes under criticism because it arguably contracts away a city’s police powers for a period of time—the city cannot impose any new changes on the development. As Selmi writes, “the government is contracting away part of the power that is the very reason for its existence.” However, it is no different than if the project had vested under traditional land use laws, or traditional vesting periods. After all, when a project vests, government cannot interfere without just compensation. The difference between vesting under a development agreement and vesting under the zoning code is that the former happens much earlier. If we wished to undercut the need for development agreements, one way would to pass laws granting vested rights earlier in the development process.

Equity

The interesting thing about the equity criticism is that it advocates for inequitable relationships, which is fine. Traditional relationships between cities and developers were never intended to be equitable. Through its police powers, the city government has the exclusive authority to grant permits—the exclusive right to say what you can or cannot do with your property. The development agreement, and use of contract law, implies that both parties are, in essence, equal and can find mutual understanding. However, anyone who has engaged in a development agreement with a city knows this is hardly true. Sure, each party has an interest in adopting a development agreement once negotiations begin. However, the city will always have the upper hand because it still maintains a monopoly on granting permits. While each party wants something, the city is always the party that can say no more easily than the developer because without permits, the developer simply owns undevelopable land. More importantly, the development agreement, as a contract, allows the city to exact more from developers than would normally be allowed by law.

Of course, my counter to the equity argument may seem odd because I’m arguing that the preferred (by critics) status quo of inequity remains. But the truth of the matter is that the practice of negotiations has always put the city in the driver’s seat.

Best Alternative

Returning to my opening statement, I've seen a lot of development agreements pass through my office. They are very useful tools for projects large and small. They ensure certainty in the face of a complicated land use regulations designed to meet the ever changing and contradictory goals desired by the public. There may be better alternatives than continuing to use the development agreement, but until such time as we are willing to thoughtfully re-examine both our land use goals and policies, development agreements are the best alternative.

For now.