Berliner Cohen Wins School Fee Refund for Developer

After five- and one-half years of litigation, a dispute between Berliner Cohen’s developer client and a school district over the validity of school fees assessed by the District on a residential housing project has come to an end.

The result was a judgment ordering the District to refund in excess of $700,000 to the developer ($500k in school fees paid under protest plus years of interest at 8%).

In charge of the case for BC was Senior Partner, Andrew L. Faber, the head of the Land Use and Municipal Law Department of the firm. We interviewed Andy to learn more about the case, which is officially reported as SummerHill Winchester, LLC v. Campbell Unified School District, 30 Cal.App.5th 545 (2018). We will be happy to provide copies to any interested reader.

BC: What are school fees, anyway?

Andy: How to finance capital facilities for school districts needing to expand due to the impacts of growth has been a subject of much legislation in California. In 1986, a bill known as SB50 established a statewide system of school fee administration. Under SB50, school districts are allowed to assess Level 1 Fees, which are set by State Law at a maximum dollar amount per square foot.  That amount is adjusted every two years, and currently stands at $3.79 per square foot of residential construction and $0.61 per square foot of commercial construction. Developers generally pay these fees as a matter of course, and presumably pass the cost onto the ultimate home buyers.

 BC: Why didn’t the developer simply pay these fees in this case?

Andy: This development was a little unusual, because it had taken a number of years to get off the ground for a variety of reasons. Because the school fees were first adopted during the course of the project, the developer had not proforma’ed them in their original budget. So the developer asked us evaluate whether the newly-imposed fees were valid. 

BC: What are the basic requirements to impose school fees?

Andy: The law requires that such fees can only be assessed to remedy impacts caused by developments. Thus, in order to justify the fees, the school district has to show that during the lifetime of the fee there will be an increase in enrollment due to new construction, and that the district will need to provide additional capital facilities to accommodate the new students.  The fees cannot be used to pay teacher salaries or administrative costs, but only for actual capital improvements.

BC: How does a district typically justify such fees?

Andy: A district typically hires a consultant to prepare what is called a “Nexus Study” to evaluate these factors.  By now this methodology is pretty well understood. In fact, I told the judge at trial that the last time I had litigated such a matter was literally 30 years ago when the use of such studies was not as clearly understood as it is now.

BC: What was wrong with this particular study?

Andy: There were several things wrong. In the first place, the estimate of new students was quite fragmentary and incomplete. It showed, however, that a total of 67 new students would impact the elementary school district over a period of five years. The district claimed that they were already at maximum capacity of roughly 8,000 students, so these 67 expected new students would cause a need for some physical improvements. 

BC: That sounds OK; what was the problem?

Andy: The biggest problem was that the District did not say what, if any, capital improvements they intended to construct with the fees. There are many permissible capital expenditures, such as building or renting portable classrooms, doing repairs to allow previously unused rooms in existing schools to be used for classrooms, renovating a special purpose room for classroom use, etc. But the District did not identify any of these kinds of improvements. The Appellate Court quoted with approval from our brief: “They have to calculate how much new development there will be, how many students it will generate, what capital facilities are necessary to accommodate those students, what that costs, and then do some math to spread those costs over the new development. Really, all they did was the math. They didn’t do any of the rest.”

BC: What did the District say they were going to do with the money?

Andy: They took the position that because they were at capacity, any new students caused some need for additional facilities. To put a number on this need, they estimated the cost of building two new schools with a total capacity of 1,600 students, and then calculated the cost of per student. We argued in our brief that the District could have lawfully collected the funds for a variety of projects, and that we were not trying to micromanage how they used the money. However, the one thing we knew that they were not going to do was build two new schools, so they couldn’t calculate the amount of the fee on that basis.

BC: Sounds pretty straightforward. Why did it take five and a half years to litigate?

Andy: Well, I thought it was pretty straightforward from the beginning. In fact, there actually were two school districts involved, that were splitting the maximum fee. The developer had paid $500,000 to the Elementary School District and about $200,000 to the High School District.  The High School District, surprisingly, had no Nexus Study.  We offered a generous partial refund to both Districts. The High School District capitulated immediately, since their fee was completely indefensible. For some reason, however, the Elementary School District chose to fight.

BC: Did this case actually go to trial?

Andy: Yes, it did. The trial was a “writ of mandate” trial, which is a trial that is conducted on the briefs and extended oral arguments, without actual live witnesses. The trial judge ruled in our favor, ordering a full refund plus interest. The District then appealed the case, and it sat at the Court of Appeal for quite some time. When they finally issued their decision, it was 100% in our favor. 

BC: Is this case now precedent for other developers and school districts?

Andy: Indeed; in fact, it has already been cited in another reported school fees case.  Most appellate cases in California are actually not published in the official reports. This means that they are binding between the parties, but do not become precedent that can be cited by others. The original opinion issued by the appellate court was not to be published, but the Building Industry Association asked the appellate court to publish the case, and they agreed. The District and a statewide school organization then asked the California Supreme Court to order the case de-published, and a debate raged for a while. We took no position on this issue, but ultimately the Supreme Court allowed the published case to stand, so it is now precedential law in California. 

BC: So what was the ultimate result?

Andy: Well, as stated earlier, the developer had paid $500,000 in school fees to the District under protest. Under the Mitigation Fee Act, such fees, if wrongfully assessed, bear interest at 8%. Accordingly, the ultimate judgment in favor of the developer was for a refund of in access of $700,000.

BC: Are there any lessons to be learned?

Andy: I think there are two. For developers, don’t always assume that all fees demanded by public agencies, including school districts, are valid. If you have questions, a little bit of digging may uncover any major flaws. And don’t assume that any Nexus Study that you are presented with was done properly. In fact, in this case the consultant who did the Nexus Study claimed that he had done 400 such studies, using the same methodology, and none had ever been challenged! For school districts, I would suggest that they be a little more careful in reviewing draft Nexus Studies to make sure they pass legal muster.  School districts have very legitimate needs for capital facilities, and the law allows them to charge developers for impacts caused by new development. But it has to be done following the correct process and with suitable support. 

BC: Are you happy about the result?

Andy: Professionally, of course.  We evaluated the case properly, litigated it well, and achieved a good result for the client.  But my feelings are mixed from a public interest point of view.  Neither the client nor I are pleased that we had to sue a school district to get them to follow the law.  The District ended up financing five years of litigation, and ultimately having to refund the fees in full plus interest, which does not seem like a good use of public resources.  I’m very sympathetic to the general financial woes of school districts. It’s not easy for them to forecast enrollments (particularly with the current proliferation of charter schools), and they always need money – but they have to follow the law and not just assume that developers can be forced to contribute amounts that aren’t legally justified.

BC: Thank you, Andy.