On March 29, 2018, in 1901 First Street Owner, LLC v. Tustin Unified School District, __ Cal.App.5th __ (2018) (Case No. G054086), the Fourth District Court of Appeal addressed an important case of first impression regarding the question whether the square footage of interior space outside individual apartment units—i.e., interior common area—should be included in the calculation of Level 1 school impact fees.  Interpreting the key provisions of the relevant school fee statutes, the Court of Appeal concluded that “assessable space” includes all interior common area.

School fees are authorized by Education Code section 17620(a)(1), which allows authorizes a school district to levy a fee on new residential construction pursuant to the requirements of Government Code section 65995.

Government Code section 65995(b)(1) calculates the applicable school impact fee as follows:

“In the case of residential construction . . . one dollar and ninety-three cents ($1.93) per square foot of assessable space.  ‘Assessable space,’ for this purpose, means all of the square footage within the perimeter of a residential structure, not including any carport, covered or uncovered walkway, garage, overhang, patio, enclosed patio, detached accessory structure, or similar area.  The amount of the square footage within the perimeter of a residential structure shall be calculated by the building department of the city or county issuing the building permit, in accordance with the standard practice of that city or county in calculating structural perimeters.”

The case arose after the developer of a five-story apartment building (which apparently was approved with both a vesting tentative map and a development agreement) paid school impact fees before obtaining building permits.  The developer used the “net rentable” method, the City of Tustin’s standard practice at the time, which calculated the square footage of individual apartment units but excluded everything else.  The City accepted the developer’s calculation of approximately 273,000 square feet of residential space and so informed the School District.

The School District filed an administrative appeal challenging the City’s method of calculating assessable space, but before the appeal was resolved the City revised its calculation in the District’s favor, which substantially increased both the amount of assessable space and the applicable school impact fee.  The developer then paid the increased fee under protest and filed an administrative appeal.  Although the School District prevailed in its administrative appeal, the District refused to return the increased fee.  The developer then filed suit seeking various forms of relief, including a refund of the excess fees.  The trial court ruled in favor of the District and the developer appealed.

On appeal, the developer argued, first, that the “residential structure” is each apartment unit, and that various exclusions in the school fee statute omit all interior common area, second, even if such contention is wrong, the City’s standard practice must govern, and the evidence shows the City’s standard practice was to exclude interior common area, and, third, it had a vested right to develop the project under which the City could not change the method of calculating school impact fees could not be changed.

The Court of appeal rejected each argument and affirmed the judgment.

• The Court noted the statutory definition of “assessable space” includes “perimeter of a residential structure” (emphasis added) and, based on that plain language, rejected the notion that residential “structure” could refer to individual apartment units. The Court also rejected the developer’s claim that by including interior common area in assessable space, apartment buildings would be assessed differently than single-family homes, holding that because all interior space is assessable, apartments and single-family homes are treated equally.  And the Court held that the term “covered or uncovered walkway,” in the exclusions of section 65995(b)(1), refers to exterior walkways, not interior hallways.
• The Court refused to interpret section 65595.5, dealing with the Level 2 school fee methodology for anticipated future development, which requires the calculation of “the projected total square footage of assessable space of residential units anticipate to be constructed during the next five-year period” (emphasis added), and disagreed the two statues must be interpreted in tandem.
• The Court rejected the developer’s claim that the City’s former “standard practice” of using a “net rentable” method must apply here, reasoning that the “standard practice” referred to in the statute requires calculating the square footage within the perimeter of a residential structure and a “standard practice” that calculates something else does not qualify.
• The Court rejected the developer’s argument that the City’s decision to change its method of calculating assessable space violates the developer’s vested rights. The Court first noted that Government Code section 66498.1 states that the approval of a vesting tentative map “does not grant local agencies the option to disregard any state or federal laws, regulations, or policies.”  The Court also noted that the development agreement reserved to the City the power to enact rules after the agreement’s effective date that “are required to comply with mandates under state and federal laws, rules and regulations (whether enacted previous or subsequent to the Effective Date.”  Thus, because the City’s “standard practice” was not in compliance with Government Code section 65995(b)(1), the City was entitled to  adopt a new method of implementing the statutory requirement.

1901 First Street is a major new case for developers and homebuilders that provides clarity regarding the calculation of Level 1 school impact fees: “All interior space is assessable.”  Thus, in those agencies that have historically excluded certain interior common areas in the calculation of assessable space, such as mechanical rooms, storage rooms, fitness centers, lounge areas, recreation rooms, indoor pools, elevator shafts, and the like, the result is likely to be substantially increased fee loads.