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Posts from June 2014.

Michigan road signCounty of Jackson vs. City of Jackson, 2013 WL 3957695 (Mich. App.) involved defendant’s attempt to raise revenue for certain city services such as street sweeping, catch basin cleaning, leaf pickup, and mulching by a storm water management utility charge on all property owners.  The Headlee Amendment to the Michigan Constitution prohibited imposition of a tax on property without an affirmative popular vote.  Before the imposition of the utility charge, the city had funded its obligations under the federal Clean Water Act through property and gas taxes from the general fund and road fund, respectively, as well as certain surcharges on water and sewer bills.  By ordinance, the city created a storm water utility to manage surface and storm water through an annual charge imposed on all property, whether developed or not, in the city and limiting the revenue derived from the charge to storm water facility construction operation and maintenance.  The charge was computed based on an estimate of storm water runoff from each parcel which charge considered whether the surface is all or partially impervious (although it had a uniform charge on small, single family residential lots).  The ordinance also provided for various credits for reducing the amount of storm water and surface water discharge, provided for administrative appeals in the computation of charges, and allowed for enforcement through civil actions, discontinuation of water service and the like.  Plaintiff local government and various private entities brought an action for declaratory, and for monetary and injunctive relief against the ordinance.

The Court found that plaintiffs bore the burden of proof to show the ordinance was invalid or unconstitutional and required plaintiffs to show that the fee was a “tax,” and thus not permitted without a popular vote.  In Bolt v. City of Lansing, 221 Mich App 79, 561 NW2d 423 (1997), a similar scheme was found invalid by the Michigan Supreme Court, which used a 3-factor analysis to distinguish a fee from a tax, i.e.: (1.) a fee serves a regulatory purpose; (2.) a fee is proportional to services rendered; and 3. a fee is voluntary.  Neither of the first two factors were met, especially as two-thirds of parcels in the city already had a separated sewer and storm water system which those owners had already paid for through general taxes or individual assessments.  The Bolt ordinance failed to distinguish between charges based on services provided as to the relationship between the charges and benefits conferred.  Moreover, the ordinance in that case and this, while relating to rainfall on a parcel, did not deal with the treatment of pollutants from which parcels discharge into navigable waters.  Finally, the fees in both cases were neither voluntary nor avoidable.  Also important in Bolt were the following: (1.) the fee revenues were to be used on projects which had been financed by the general fund; (2.) the indebtedness from the fee could be secured by a lien; and (3.) the fee was sent along with property tax statements.

The Bolt court concluded:

We conclude that the storm water service charge imposed by Ordinance 925 is a tax and not a valid user fee.  To conclude otherwise would permit municipalities to supplement existing revenues by redefining various government activities as “services” and enacting a myriad of “fees” for those services.  To permit such a course of action would effectively abrogate the constitutional limitations on taxation and public spending imposed by the Headlee Amendment, a constitutional provision ratified by the people of this state.  In fact, the imposition of mandatory “user fees’ by local units of government has been characterized as one of the most frequent abridgments “of the spirit, if not the letter,” of the amendment.

The danger to the taxpayer of this burgeoning phenomenon [the imposition of mandatory user fees] is as clear as are its attractions to local units of government.  The “mandatory user fee” has all the compulsory attributes of a tax, in that it must be paid by law without regard to the usage of a service, and becomes a tax lien of the property.  However, it escapes the constitutional protections afforded voters for taxes.  It can be increased any time, without limit.  This is precisely the sort of abuse from which the Headlee Amendment was intended to protect taxpayers.  [Headlee Blue Ribbon Commission Report, supra, § 5, pp-26-27.] [Bolt, 459 Mich at 169.]

Turning to the case at hand, the Court found the fee served a dual purpose – financing treatment of solid pollutants in storm and surface water runoff, as well as supplementing general revenue-raising efforts by shifting funding of those activities already provided from the city’s general and street funds to a charge-based system that augments the city’s general fund.  The Court concluded that the “minimal” regulatory purpose was far outweighed by its revenue-raising features.  In fact, there was no effective regulation of discharge from an individual parcel (aside from the ordinance’s credit scheme).  The background of the challenged ordinance shows its primary rationale was revenue raising and thus violates Bolt by allowing the city to supplement its existing revenue streams by redefining a governmental activity as a “service” for which a user fee may be charged.  Moreover, there was no relationship or proportionality between the service and the fee – rather the charge resulted in a benefit to the general public.  While larger parcels were more susceptible to proportionality under the city’s fee schedule, the bulk of parcels in the city (83%) were single family residential lots for which a uniform single charge was imposed.  Finally, the ordinance in this case, as in Bolt, was compulsory and effectively enforced through various means.  Given these attributes, the ordinance was deemed to be a tax and thus invalid without a popular vote.

This case deals with the details of property tax limitation measures, which differ from state to state.  As a matter of logic, the case makes a great deal of sense and distinguishes fees from taxes. County of Jackson vs. City of Jackson 2013 WL 3957695 (Mich App).

Historical Brick Wall.Innocent Property Owners may no longer be protected by federal legislation meant to toll the statute of limitations on an action against a late discovery of contaminated property.

In CTS Corporation v Peter Waldburger et al., 573 U.S. ____ (2014),  the United States Supreme Court ruled that state law may override federal legislation meant to protect a property owner when the discovery of environmental contamination is years after the release.

Congress enacted the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), including a provision that, by its terms, pre-empts statues of limitations applicable to state-law tort actions in certain circumstances with respect to an injury from a release of hazardous substances. Under these provisions, the statute of limitations begins to run on an action after the property owner or person discovers that the harm to their property or person was caused by contamination of a previous property owner or another person.

However, several states, including Oregon, Connecticut, Kansas, North Carolina, and Alabama, have statutes of repose that limit the time frame a property owner may bring a cause of action regardless of the date of discovery of the contamination or its source.

In North Carolina, homeowners challenged their state’s statute of repose that limited its ability to seek compensation for the release of hazardous substances 24 years before by an electronic manufacture that contaminated their property. The state’s statute of repose limited any cause of action to 10 years after the last culpable act, regardless of discovery of the contamination or its source.  The question presented to the United States Supreme Court was whether a federal statute on the timeliness of suits for harm caused by environmental contamination, 42 U. S.C. §9658, preempts North Carolina’s 10 year statute of repose provision.

In the ordinary course, a statute of limitations creates a time limit for suing in a civil case, based on the date when the claim accrued, and is often based on the date of discovery of the harm.  A statute of repose puts an outer limit on the right to bring a civil action, not from the date of discovery, but from the date of the last culpable act or omission of the defendant. In a 7 to 2 decision, the Supreme Court held that a statute of repose is not within the pre-emption mandate of the act, and that §9658 addressed statute of limitations by its express terms but that language did not include pre-emption of a state’s statute of repose. Thus, because the states are independent sovereigns, the police powers of the state are not superseded by the Federal Act, unless there is a clear manifest from Congress.

The Court reversed the Court of Appeals for the Fourth Circuit dismissing the homeowners’ state law claim for water contamination against the electronic manufacturer; 42 U.S.C. §9658 pre-empts only statutes of limitations and not statutes of repose.  The question now remains, will additional state legislatures adopt statutes of repose in light of this decision.

Cynthia M. Fraser is an owner at Garvey Schubert Barer in the firm’s Portland Oregon office.

FAR.V2Floor area ratio – commonly referred to as FAR – is the ratio of a building’s floor area to the size of the parcel on which the building is situated.  The higher the FAR the bigger the building.  A maximum FAR limits the size of the building on a parcel and many jurisdictions, including the City of Portland, have maximum FAR standards that place limits on how large a FAR is allowed within different zones (see City Code 33.510.200).

Portland, however, like many jurisdictions, allows FAR beyond the maximum otherwise allowed by transferring FAR from one parcel to another under certain circumstances.  Generally, how this works is a parcel with a maximum FAR the owner doesn’t intend to use, can transfer the “excess FAR”, i.e., the difference between the amount of FAR the property owner intends to use, and the maximum that otherwise is allowed on the owner’s parcel, to another parcel.  The receiving parcel would then be able to “add” this additional FAR to the otherwise maximum FAR allowed on the receiving parcel and develop a bigger building.  A bigger building generally brings more value to the “receiving” parcel and the “donating” parcel will likely expect some consideration for the transfer of the excess FAR, as the “donating” parcel will enter into a covenant that runs with the land that restricts development on the donating parcel to a FAR less than the maximum otherwise allowed.

The West Park Avenue (“WPA”) Parcel, commonly known as the hole in the ground west of Nordstrom in downtown Portland, was the recipient of excess FAR.  In 2010, Fox Tower, LLC (“Fox Tower”) the owner of property next to the WPA Parcel and including a parcel now known as Director Park, transferred FAR that would otherwise be available to the Director Park Parcel to the WPA Parcel.  The transferred FAR was the difference between the maximum FAR the City Code would allow on the Director Park Parcel and the amount of FAR that was actually being used for the development of Director Park.  The Park is basically hardscape with little building development, so there was a significant amount of excess FAR that was not used.  By adding the amount of excess FAR from the Director Park Parcel to the base FAR for the WPA Parcel, the WPA Parcel was able to achieve 354,000 square feet of floor area, i.e., a building significantly larger then would otherwise have been allowed on the WPA Parcel.

But the City Code in addition to allowing transfer of FAR from one parcel to another also allows “bonus floor area options” (City Code 33.510.210 C.), i.e., a parcel can have “Bonus FAR” if it does certain things including providing a “water feature or public fountains.”  Director Park has a water feature.  The City Code also allows additional FAR when a parcel provides bicycle parking and locker rooms, i.e., a “locker room bonus option” (to encourage bicycling).  The Director Park Parcel did not have any bicycle parking and locker rooms, however, Fox Tower, the previous owner of the Director Park Parcel had reserved an easement on the Director Park Parcel for underground parking.   That easement would allow for the construction of bicycle parking and locker rooms – creating additional FAR opportunity for the Director Park Parcel.

Clearly, the Director Park Parcel did not need additional FAR,   although the WPA Parcel could use more FAR and the Director Park Parcel had those “bonus floor area options”.  By now the Director Park Parcel was owned by the City of Portland.   In order for the WPA Parcel to obtain the benefit of the “bonus floor area options” in May of this year, the three parcel owners – WPA, City of Portland and Fox Tower – entered into an amendment (the “Bonus FAR Amendment”) to the 2010 Agreement that transferred the excess FAR from the Director Park Parcel to the WPA Parcel.  The Bonus FAR Amendment resulted in the City transferring the Bonus FAR available to the Director Park Parcel because of the water fountain to the WPA Parcel.  This “Water Feature Bonus FAR” qualified the WPA Parcel to get an additional 10,000 square feet of FAR.  The Bicycle Parking and Locker Room Bonus FAR, Fox Tower, owner of the subsurface easement on the Director Park Parcel agreed to allow WPA to construct bicycle parking and locker rooms within the easement resulting in a Bonus FAR of an additional 50,000 square feet for the Director Park Parcel, which the City as the owner of the Director Park Parcel transferred to the WPA Parcel.

As mentioned above, additional FAR has value and consideration, which is typically paid by the receiving parcel for the additional FAR.  The WPA Parcel was receiving a significant increase in FAR from the Director Park Parcel and in return, although Fox Tower did not get any of the Bonus FAR, Fox Tower agreed to pay the City $100,000 to be used in maintaining and improving Director Park (Fox Tower and WPA are related entities- with the President of each entity being the same person).

But that is not the only consideration that was provided under the parties “Bonus FAR Amendment” as this Amendment provides if WPA elected to contract for security and janitorial services at its building that it would only contract “with contractors whose employees that directly perform security and janitorial services …. are represented in collective bargaining by a labor union” and “if the WPA employs persons directly to perform such work, WPA shall remain neutral during any union organizing campaign directed at security and janitorial employees …. and shall recognize the union as the representative of such employees upon a showing of majority status by the union through cards signed by such employees authorizing union representation.”

 As stated above FAR has value and it is common when FAR is conveyed from one parcel to another that consideration is paid.  In this case the City as the owner of the donating parcel is receiving consideration in the form of $100,000 to maintain Director Park.  The other consideration granted was the above obligation of the WPA owner to use union labor.  An obvious question is “why” was this included in the Bonus FAR Amendment?   Was this an effort to obtain some assurance that those affected employees might receive a livable wage?  Another question is “how” did this consideration end up in the Bonus FAR Amendment?  Was it proposed by the City?  The answers to these questions are not known, but there is an answer to “who” is benefitted by this consideration.  The “who” is organized labor.

It must have been an interesting negotiation

Washington’s Initiative 502 decriminalized, licensed and regulated marijuana sales under state law, and prospective retail licensees are gearing up to begin operations. On June 3, 2014 a suit was filed by one prospective licensee against the City of Wenatchee over its prohibition on issuing business licenses for business activities that are not lawful under city, state, and federal law. Because the sale of marijuana remains unlawful under federal law, Wenatchee has made clear that it will not license marijuana businesses that are duly licensed by the state Liquor Control Board to operate in Wenatchee. In October 2013, the Wenatchee City Council voted 4-3 against a proposed ordinance that would have allowed business licenses to be issued to state-licensed marijuana businesses.

The suit challenges Wenatchee’s authority to prohibit business activity that is lawful under state law and licensed by the state. This issue is being hotly debated by Washington legal authorities. In January the Washington Attorney General issued a non-binding opinion in which he concluded that I-502 did not prevent local governments from banning marijuana businesses within their jurisdictions. In April, a Washington Court of Appeals issued an opinion concluding that local governments could prohibit collective medical marijuana gardens because they remained unlawful under the State’s medical marijuana law. It remains an open question whether Washington courts will allow a local government to prohibit business activity that is lawful under state law or whether the state-licensed and regulated marijuana market will preempt local bans.

This suit will be closely watched by local governments and marijuana businesses alike. If the reaction of Wenatchee’s Mayor reported, as by The Wenatchee World, is any indication, local governments are not excited about becoming the subject of costly litigation to establish the boundaries of state and local law: “‘I’m trying to balance a budget.’ . . . ‘We’ve got big issues in the city. Having the distraction of this marijuana issue is not something I want to deal with.’”  These concerns could rise dramatically if Wenatchee chooses to respond to such suits by arguing that the state’s licensing and regulation of marijuana businesses is in conflict with federal law. That claim would expand the lawsuit while threatening newly forming marijuana businesses statewide, and could invite the participation of groups like the American Civil Liberties Union and possibly Washington State itself to defend state law.

Unless expressly stated otherwise, any federal tax advice contained in this communication (including attachments) is not intended to be used, and cannot  be used, for the purpose of avoiding federal tax penalties.

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