In an opinion filed on January 4, and later certified for partial publication on January 30, 2018, the Fifth District Court of Appeal affirmed a trial court judgment rejecting appellant’s claim that the EIR for the City of Visalia’s general plan update improperly omitted an analysis of the plan’s potential urban decay effects.  Visalia Retail, L.P. v. City of Visalia (5th Dist. 2018) _____ Cal.App.5th _____.  A new land use policy included in the update for areas designated “Neighborhood Commercial” provided that no shopping center tenant in such areas could be larger than 40,000 square feet.  Appellant, a property owner affected by the policy, objected to the City and submitted the opinion of an experienced local commercial real estate broker that the policy would cause anchor tenant vacancies and/or lower-traffic anchors that would reduce landlords’ rental income used for maintenance and improvements, and would have other economic effects resulting in a “downward spiral of physical deterioration” and “physical blight and ‘urban decay’ deterioration[.]”

City staff and the advisory committee charged with preparing and recommending a preferred plan had not recommended any tenant size cap, observing that maximum size limits for anchor stores are somewhat arbitrary and may create difficulties for grocery stores and potential anchor tenants.  Nonetheless, the City Council ultimately determined to adopt a 40,000 square foot cap.  While the propriety of the tenant size cap was discussed by city staff and council members during the general plan update process, the EIR itself did not analyze its potential for urban decay.  Appellant sued, alleging the EIR’s omission of an urban decay analysis rendered it inadequate under CEQA, and that the new policy also conflicted with numerous other general plan policies and goals, and thus rendered the plan internally inconsistent.

The Court of Appeal’s opinion affirmed the trial court’s judgment rejecting all appellant’s claims.  Key takeaways from the published portion of the opinion addressing appellant’s CEQA arguments include:

• An EIR is required to analyze a project’s significant physical, not economic, impacts on the environment. (Pub. Resources Code, § 21100(b); CEQA Guidelines, § 15382.)  “Because of the physicality requirement, “[a]n economic or social change by itself shall not be considered a significant effect on the environment.””  (Citing and quoting § 15382, emph. Court’s.)  Accordingly, evidence of economic and social impacts that don’t contribute to physical environmental changes don’t amount to substantial evidence of a significant effect (Guidelines, § 15064(f)(6)), but where the project’s economic or social effects cause a physical change, that “change may be regarded as a significant effect in the same manner as any other physical change resulting from the project.”  (§ 15064(e).)
• “CEQA is not a weapon to be deployed against all possible development ills.” (Quoting Joshua Tree Downtown Business Alliance v. County of San Bernardino (2016) 1 Cal.App.5th 677, 685.)  “The fact that a project “may drive smaller retailers out of business is not an effect covered by CEQA.  Only if the loss of business affects the physical environment – for example, by causing or increasing urban decay – will CEQA be engaged.””  (Quoting , citations omitted.)
• An EIR is required to analyze every fair argument raised about the potentially significant environmental impacts that a project may cause. Per the Court:  “If appellant had raised a fair argument of urban decay based on substantial evidence, the EIR would have been required to analyze it.”  (Citing Protect the Historic Amador Waterways v. Amador Water Agency (2004) 116 Cal.App.4th 1099, 1109 [“in preparing an EIR, the agency must consider and resolve every fair argument that can be made about the possible significant environmental effects of a project. . . .”].  Accordingly, the issue before the Court was:  “can it be fairly argued from substantial evidence that there is a reasonable possibility [that the tenant size cap policy] will cause urban decay in the form of significant, physical effect(s) on the environment?”
• While the real estate broker’s opinions presented “an earnest policy case against” the tenant size cap policy, the Court held they failed to constitute substantial evidence supporting a fair argument that it may cause significant environmental effects cognizable under CEQA. The broker’s “urban decay” opinions were based on evidence: (1) that he was “personally unaware of any grocers willing to build new stores under 40,000 square feet”; (2) that “a “typical” Save Mart, Safeway/Vons, Albertsons or Lucky store requires at least 50,000 square feet to be profitable”; (3) that another retailer (Tesco) unsuccessfully launched multiple 10,000-20,000 square foot grocery stores; and (4) that three sub-40,000 square foot Visalia grocery stores went out of business.
• In dispatching the broker’s evidence as insufficient to support a fair argument, the Court noted his claim to be “personally unaware” of grocers willing to build below 40,000 feet did not mean there were none; moreover, he acknowledged that Walmart built a sub-40,000 square foot supermarket, and did not account for the possibility of a Trader Joe’s or Whole Foods market doing likewise. Per the Court:  “Inferring that urban decay would result from the incompatibility between [the tenant size cap policy], and the business model of four grocers would be speculation.”  Likewise, one grocer’s failed efforts to build stores one-quarter to one-half the size allowed by the cap did not support a fair argument that the cap would cause similar results, and the lack of any evidence or analysis as to why three other sub-40,000 square foot stores closed in Visalia rendered the inference that they closed due to their size speculative.
• “In sum, the [broker’s] report does not provide the requisite basis for appellant’s challenge because (1) its analysis of causation was speculative, and (2) the potential economic consequences it identifies do not “mean that urban decay would result. Common sense alone tells us nothing about the magnitude of th[e] effect. . . .”  (Quoting Joshua Tree, supra, 1 Cal.App.5th at 691.)  While the broker’s “report suggest[s] that some grocers would refuse to locate in Visalia under [the policy], it fails to support the implication that such vacancies and lower quality tenants would be so rampant as to cause urban decay.”  The Court concluded this omission was important because even were a handful of properties to remain permanently vacant, that would not necessarily constitute a change to the physical environment of a kind implicating CEQA.
• In reaching these conclusions, and in distinguishing its prior decision in Bakersfield Citizens for Local Control v. City of Bakersfield (2004) 124 Cal.App.4th 1184 as presenting a significantly different factual and evidentiary scenario, the Court clarified that the standard of review it applied was consistent with Bakersfield Citizens. Per the Court:  “It is not a project challenger’s responsibility to adduce substantial evidence proving that the project will cause urban decay.  But it is the project challenger’s responsibility to address substantial evidence supporting a fair argument that the project may cause urban decay.”  (Citations omitted, emph. Court’s.)

The Court’s opinion distills the law and clarifies the standard of review regarding when CEQA requires an EIR to include an analysis of potential “urban decay” impacts.  It also illustrates that the ordinarily low threshold “fair argument” test is not a toothless one in this context.  When it comes to determining whether an EIR is required to include an “urban decay” analysis, this opinion underscores that courts will not indulge speculative inferences to bridge the gap between accurate but incomplete market data and the required “fair argument” of the possibility of the relatively severe physical environmental effects that constitute “urban decay”.