The Fourth District Court of Appeal recently issued an opinion related to the proper interpretation of Government Code § 65995 dealing with statutory school fees. The court held that the City of Santa Ana correctly calculated the area of an apartment for school fee purposes by including common areas and not just calculating the area of individual apartment units. 1901 First Street Owner, LLC v. Tustin Unified School District___ Cal.App.5th ___, Case No. G054086 (4th Dist. Mar. 29, 2018). ]

Factual Background

Plaintiff 1901 First Street Owner, LLC (First Street) is the developer of a residential project that includes a five-story apartment building in the City of Santa Ana (City). Before obtaining building permits, First Street was required to pay a school impact fee to the Tustin Unified School District (District). First Street calculated the square footage using a “net rentable” method of the square footage of individual apartment units, which was the City of standard practice at that time.

The District objected to the net rentable method and argued that method did not include “all of the square footage within the perimeter of a residential structure” pursuant to Government Code § 65995(b)(1) and filed an administrative appeal with the City. The City did not contest the appeal and revised its square footage calculation based on the perimeter of the building, which resulted in an increase of approximately 70,000 square feet, increasing the fee by $238,549.86. First Street objected to the change, filed its own administrative appeal, and paid the increased fees under protest.

The administrative hearing officer found in favor of First Street and ordered the District to refund the portion of the fees First Street had paid under protest. The District refused and First Street filed suit. The trial court found in favor of the District, holding that section 65995(b)(1) precluded the net rentable method the City initially used, and First Street appealed.

Legal Background

Education Code § 17620(a)(1) authorizes a school district to levy a fee on new residential construction “subject to any limitations set forth in Chapter 4.9 (commencing with Section 65995) of Division 1 of Title 7 of the Government Code.”

Section 65995 allows school impact fees to be calculated based on the square footage of “assessable space” for residential construction. Specifically, as to residential construction, Section 65995(b)(1) calculates the applicable fee as follows:

• In the case of residential construction . . . one dollar and ninety-three cents ($1.93) [adjusted for inflation] per square foot of assessable space. ‘Assessable space,’ for this purpose, means all of the square footage within the perimeter of a residential structure[.] 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.

Based on its interpretation of the statute, the City’s standard practice was to calculate the assessable space as including the square footage of each residential unit in an apartment project, exempting other areas, such as walkways, overhangs, and carports. The City had previously used this same standard practice of calculating assessable space for another one of First Street’s projects.

The Court of Appeal’s Decision

The court began by construing the plain language of the statute, holding that interior common areas of an apartment building “clearly constitute[ ] assessable space.” The court rejected the argument that “structure” includes only an individual apartment unit, as Government Code section 65995(b)(1) defines “construction” as new construction and reconstruction of existing building for residential [use] . . . .” Slip Op. at 7.

The court next rejected First Street’s attempt to use the language contained in § 65995.5, which provides a different manner of fee calculation not utilized in the instant matter, as the section refers to residential units and is used to calculate fees for anticipated future development as opposed to fully developed projects.

Common Interior Space

The court also declined to accept First Street’s argument that assessing common interior space for apartments would result in disparate treatment for apartments and single-family homes, holding that all interior space is treated the same, and that “[i]t does not matter that some interior spaces are individually owned, whereas others are common area.” Slip Op. at 8.

Statutory Exclusions Argument

Next, the court rejected First Street’s assertion that the trial court erred by not accounting for the exclusions in § 65995(b)(1), which provide for exclusions for things such as carports, garages, and patios. The court noted that First Street did not attempt to specify which exclusions apply, and regardless, many interior common areas found in apartments such as common lounge areas and fitness centers are not part of the list of exclusions. Slip Op. at 8. The court further construed the definition of “walkway,” concluding that its use in the statute refers to “an external walkway, not an interior hallway” because the term is used in association with other terms such as carport and patio that refer to exterior structures. Slip Op. at 9.

The court then addressed the argument that the City’s standard square footage calculation practice must govern, holding that the:

• . . .“standard practice” referred to in § 65995, subdivision (b)(1), is specifically the standard practice of calculating the square footage within the perimeterof a residential structure. A standard practice of calculating something else does not qualify. Slip Op. at 10.

As such, the fact that the City initially undertook a calculation that did not include the perimeter of the structure was immaterial.

Vesting Tentative Map and the Government Code

Finally, the court rejected First Street’s claim that the project’s vesting tentative tract map precluded the City from modifying its assessable space calculation, as Government Code § 66498.6(b) states that approval of a tentative vesting map “does not grant local agencies the option to disregard any state or federal laws, regulations, or policies.” Additionally, the development agreement specifically 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).” Slip Op. at 10.

Conclusion and Implications

This is a significant new case for residential builders and developers because it clarifies the ambiguity in § 65995 as it relates to assessable space calculations. The precedent set by this opinion should be considered carefully by multi-family project proponents because larger common areas will now result in higher school fees. Cities and counties should also reevaluate their standard practices for calculating a project’s square footage to ensure that they are not violating § 65995.

The court’s decision is available online at: http://www.courts.ca.gov/opinions/documents/G054086.PDF

(Alex DeGood, Nedda Mahrou)