41 P.3d 87 (Cal. 2002)
447 U.S. at p. 262, 100 S.Ct. 2138; Penn Central, supra, 438 U.S. at pp. 124, 132, 98 S.Ct. 2646.) But the HCO neither targets an arbitrary small group of property owners, nor deprives all the burdened properties of so much of their value, without any corresponding benefit, as to constitute a taking on its face. As discussed earlier, the HCO affects all the approximately 500 residential hotels in San Francisco, comparable to the "over 400" New York City landmarks the United States Supreme Court relied upon in holding that landmark laws could not be characterized as "discriminatory, or 'reverse spot,' zoning." (Penn Central, supra, at p. 132, 98 S.Ct. 2646.) Also like the landmarks law upheld in Penn Central, the HCO allows the property owner to continue the property's preordinance use unhindered; like the landmarks law, therefore, the HCO "does not interfere with what must be regarded as [the property owner's] primary expectation concerning the use of the parcel." (Id. at p. 136, 98 S.Ct. 2646.) Finally, the chief purpose of the HCO, ensuring affordable and available housing for those San Franciscans who would otherwise be without it, carries benefits for all the City's property owners, including those operating tourist hotels. (See id. at pp. 134-135, 98 S.Ct. 2646 [landmarks law benefits all New Yorkers].) We cannot agree with the dissent that a law applying on equal terms to all properties in a sizeable class defined by use, designed to benefit the City as a whole, and merely prohibiting a change of use from residential to commercial unless the owner mitigates the detrimental impact of that change, constitutes a facial taking of property.
The above may help to explain why the dissent's hypothetical concerning governmental appropriation of an automobile is inapposite. A law arbitrarily selecting a private automobile owner to dedicate his or her car to public use or pay for the government to buy another one would, as the dissent suggests (dis. opn., post, 117 Cal.Rptr.2d at p. 309, 41 P.3d at p. 121) clearly require compensation. Less clear, but more like the present case, would be a law requiring all common carriers to take certain mitigation measures before converting from passenger to freight service. A burden placed broadly and nondiscriminatorily on changes in property's use is not the equivalent of an arbitrary decision to hold an individual's property for ransom. As elsewhere in takings law, the answers are found not in absolute rules for all cases, but by the particularized weighing of public and private interests. (Agins v. Tiburon, supra, 447 U.S. at pp. 260-261, 100 S.Ct. 2138.)
Finally, the dissent insists that owners of residential hotels cannot be required to continue the use of their property as low-income housing, or to mitigate the impact of ending that use, because they "did not cause poverty in San Francisco." (Dis. opn., post, 117 Cal.Rptr.2d at p. 309, 41 P.3d at p. 120.) But, of course, the owners of undeveloped property in Agins v. Tiburon, supra, 447 U.S. 255, 100 S.Ct. 2138, 65 L.Ed.2d 106, restricted by zoning in how intensely they could develop the property, had not (yet) caused "the ill effects of urbanization" (id. at p. 261, 100 S.Ct. 2138) the zoning law was designed to protect against, and the owners of New York City's Grand Central Terminal had not (yet) caused the loss of historic structures that motivated that city's landmarks law (Penn Central, supra, 438 U.S. at p. 107, 98 S.Ct. 2646). Here, as in those cases, it is the detrimental effects of a change in the use of property that motivates the regulation. A use not in itself noxious or harmful, such as the operation of a tourist hotel, may nonetheless call for mitigation when the change of property to that use results in the loss of an existing use of public importance. (See id. at p. 134, fn. 30, 98 S.Ct. 2646 ["Nor ... can it be asserted that the destruction or fundamental alteration of a historic landmark is not harmful"].)
If, as Justice Holmes warned, the Constitution "does not enact Mr. Herbert Spencer's Social Statics" (Lochner v. New York (1905) 198 U.S. 45, 75, 25 S.Ct. 539, 49 L.Ed. 937 (dis. opn. of Holmes, J.)), it just as surely does not enact the late Robert Nozick's "Minimal State." (See Nozick, Anarchy, State and Utopia (1974) pp. ix, 171-172, 272-274.) However strongly and sincerely the dissenting justice may believe that government should regulate property only through rules that the affected owners would agree indirectly enhance the value of their properties (dis. opn., post, 117 Cal.Rptr.2d at p. 316, 41 P.3d at p. 126), nothing in the law of takings would justify an appointed judiciary in imposing that, or any other, personal theory of political economy on the people of a democratic state.
Turning to the as-applied challenge, plaintiffs argue "[t]he $567,000 fee imposed by the Hotel Ordinance has no connection at all to the Field Brothers' tourist use of the San Remo Hotel" because (quoting the Court of Appeal) the permit simply "`allow[ed] an existing use to continue.'" As explained above, however, the mitigation fee was based on the number of units designated residential that were proposed for conversion, and the residential designation of the San Remo Hotel's rooms was reasonably based on the hotel management's own report of the rooms' use on the HCO's initial status date of September 23, 1979. Plaintiffs' operative complaint, moreover, contains no allegations specifically relating to the San Remo Hotel's use as of the initial status date. The only use allegation covering that date is a general assertion that the hotel has been "primarily" used by "transient and tourist" guests since 1916. Nowhere do plaintiffs allege that the San Remo Hotel was, in 1979 or at any time, entirely in tourist use, as would be required to support their claim that the housing replacement fee has "no connection at all" to the hotel's historical use. (As discussed earlier, the administrative record indicates that plaintiffs could not truthfully so allege, since it shows mixed tourist and residential use throughout the 1980's.) The complaint, therefore, fails to state a cause of action on the ground that the amount of the fee paid by plaintiffs bore no reasonable relationship to the impacts of their proposed conversion to tourist use.
Plaintiffs further argue that, because the conditional use permit granted them by the City Planning Commission contained a condition requiring them to offer lifetime leases to existing residential tenants, no housing was lost by conversion to tourist use. Plaintiffs' conclusion, however, does not follow from their premise. The HCO seeks to preserve the supply of affordable housing units, not merely to extend the tenancy of any individual resident. (HCO, § 41.2.) Rooms designated residential under the ordinance that were vacant or temporarily rented to tourists at the time of conversion were nonetheless housing units that would be lost in the conversion, since after conversion they would no longer be held available, by law, for residential tenants. The same is true of rooms occupied by residential tenants who declined the offered leases. Even as to any rooms for which lifetime leases were accepted, the residential designation to be lost by conversion would have preserved the residential availability of those units after the lessees moved or passed away. Accordingly, even if no current resident were required to move, the City could reasonably base the in lieu fee on the number of units designated and reserved for residential use that would be made unavailable by the plaintiffs' proposed conversion of all of the hotel's rooms to tourist use.
Finally, plaintiffs, citing Ehrlich, supra, 12 Cal.4th at page 883, 50 Cal.Rptr.2d 242, 911 P.2d 429, contend that the size of a development mitigation fee may not constitutionally be based on the loss of the property's prior use. In Ehrlich, of course, the court examined the recreational facilities fee under the "rough proportionality" standard (id. at p. 882, 50 Cal.Rptr.2d 242, 911 P.2d 429), a type of scrutiny inapplicable here. Perhaps more significantly, the fee in Ehrlich was imposed as a condition of a requested change in zoning for the subject property; there was no existing recreational use, the club having already been closed as uneconomical and its facilities demolished. (Id. at pp. 861-862, 50 Cal.Rptr.2d 242, 911 P.2d 429.) The particular recreational facilities previously existing on the property having been permissibly demolished, the city could not use the value of their loss to impose a mitigation fee for the change in zoning sought by the property owner, although the majority held the fee could be based on the costs of planning and rezoning other properties for the needed recreational use. (Id. at pp. 883-884, 50 Cal.Rptr.2d 242, 911 P.2d 429 (plur. opn. of Arabian, J.); id. at p. 902, 50 Cal.Rptr.2d 242, 911 P.2d 429 (conc. opn. of Mosk, J.).) In the present case, the housing that was to be lost by conversion of rooms from residential to tourist use had not been abandoned or demolished; nor had plaintiffs invoked their statutory right (Gov.Code, § 7060) to withdraw residential accommodations from the market. Plaintiffs sought not merely a change in the zoning affecting the site of the San Remo Hotel, but permission to change the use of existing residential facilities on the property. A mitigation fee measured by the resulting loss of housing units was thus reasonably related to the impacts of plaintiffs' proposed change in use.
The judgment of the Court of Appeal is reversed insofar as it reversed the superior court's judgment for defendant on plaintiffs' complaint. In all other respects the judgment of the Court of Appeal is affirmed.
WE CONCUR: GEORGE, C.J., KENNARD, and MORENO, JJ.
I concur in the majority opinion insofar as it finds the Court of Appeal erred in assessing plaintiffs' as-applied challenge to the City and County of San Francisco's (City's) housing replacement fee under a standard of heightened scrutiny. I also agree with much of what the majority says about the test that does apply to this exaction. My objections are that in the remainder of its analysis, the majority fails to decide the issues on which we granted review and strains to reach questions that are not fairly included in the review petition.
I ask different questions and, not surprisingly, come up with different answers. Unlike the majority, I would affirm the Court of Appeal to the extent that it remanded for further proceedings concerning the petition for writ of administrative mandate and would remand for further proceedings under the correct takings standard.
The majority frames the first question as whether the City properly required plaintiffs to obtain a conditional use permit for full tourist use of the hotel. The problem with this formulation is that it treats the issue of the conditional use permit as an all-or-none proposition. This is a mistake. The critical issue is not whether plaintiffs needed to obtain a conditional use permit if they wished to rent all of the hotel's rooms to tourists—as the majority notes, there is evidence in the record to support the finding that some rooms had historically been rented to long-term residents (maj. opn., ante, 117 Cal.Rptr.2d at pp. 281, 285, 41 P.3d at pp. 97, 100)—but how many rooms required a permit before plaintiffs could rent them to tourists. To answer that question, it is necessary first to determine how many tourist rooms are grandfathered as a permitted conditional use.
As the City points out, the process of converting residential hotel rooms to tourist hotel rooms requires two separate permits: a conversion permit from the City Department of Building Inspection under the Residential Hotel Unit Conversion and Demolition Ordinance (HCO), and a conditional use permit from the City Planning Commission under the City Planning Code. Plaintiffs do not independently challenge here the requirement of obtaining a conversion permit from the Department of Building Inspection, merely the need to obtain a conditional use permit from the Planning Commission.
The parties agree that no duty exists to obtain a conditional use permit to continue a property use that qualifies as a permitted conditional use. A permitted conditional use is one that "existed lawfully at the time a new zoning prohibition or restriction came into force" and "is conditionally permitted by the new zoning law." (Maj. opn., ante, 117 Cal.Rptr.2d at p. 283, fn. 10, 41 P.3d at p. 98, fn. 10.) Thus, a permitted conditional use in the North Beach neighborhood commercial district must have "lawfully existed" on the effective date of the 1987 ordinance. (Id. at pp. 280-281, 41 P.3d at p. 97, citing S.F. Planning Code, § 179, subd. (a)(2).) It was on this ground that plaintiffs disputed the need for a conditional use permit. (See maj. opn., ante, 117 Cal.Rptr.2d at p. 277, 41 P.3d at p. 94.)
The City asserts that no tourist rental could have "lawfully" existed in the district because of the legal restrictions on tourist rental imposed by the HCO, which was enacted in 1981 and amended in 1990. The City, however, has been unable to explain why the HCO, which is part of the San Francisco Administrative Code, should have been considered by the City Planning Commission in determining whether tourist rental "lawfully existed" under section 179, subdivision (a)(2) of the San Francisco Planning Code, where the zoning ordinances are found. Indeed, the City's statements throughout these proceedings preclude any attempt to cut and paste the HCO into the Planning Code.
As the City repeatedly asserts, the HCO is "separate" from the City Planning Code and, in particular, did not change the zoning classification of the San Remo Hotel under the City Planning Code. The City likewise concedes that "[n]either the Planning Commission nor the Zoning Administrator has responsibility for administering the HCO." The HCO is administered instead by the City Department of Building Inspection.
These concessions are consistent with an opinion letter by the city attorney issued contemporaneously with the enactment of the HCO in 1981. In that letter, the city attorney stated that the HCO was not a zoning law, that the City Planning Code "makes no distinction between the use of a hotel devoted to permanent residents or to tourists," that the adoption of the HCO "does not render an existing structure or use a non-conforming structure or use," and that whether a tourist use may continue as a permitted conditional use is governed by the applicable sections of the Planning Code. (S.F. City Atty., Opn. No. 81-54 (Sept. 14, 1981) pp. 7-8; see maj. opn., ante, 117 Cal.Rptr.2d at p. 282, 41 P.3d at p. 98.)
The city attorney's opinion letter, together with the City's concessions, undercut the City's efforts here to claim that the HCO was a critical component of the determination whether tourist use lawfully existed as a permitted conditional use under the City Planning Code. Indeed, the zoning administrator was apparently so uncomfortable with the City's belated change of heart that he declined to accept the City's newly minted position and found instead that "[i]t has been the Department of City Planning's (`Department') administrative practice to classify residential hotels designated under the Hotel Ordinance as residential uses under the Planning Code." (Italics added.) But "administrative practice" is merely a convenience; it does not aid in determining whether a prior use was lawful or unlawful. The body of law relevant to that determination—i.e., the Planning Code—did not distinguish between tourist hotels and residential hotels and therefore did not prohibit tourist rentals at the San Remo.
The superior court, on this same record, impliedly rejected the zoning administrator's restrained construction and found instead that "[s]ince the issuance of the Certificate of Use in 1981, residential use of the San Remo Hotel was the only lawful use." The majority holds—and I agree— that the superior court erred. (Maj. opn., ante, 117 Cal.Rptr.2d at p. 282, 41 P.3d at p. 98.) But the majority declines to issue the administrative writ on the separate ground that plaintiffs' proposal to rent all of the rooms to tourists is "a significant alteration or enlargement of the historical lawful use" and therefore required a new conditional use permit. (Maj. opn., ante, 117 Cal.Rptr.2d at p. 282, 41 P.3d at p. 98.) I agree that a conditional use permit is required to the extent plaintiffs wish to alter or enlarge the historical lawful use. I disagree strongly, however, with the majority's unstated and unproven assumption that this encompasses all of the San Remo's rooms. The majority has simply terminated its analysis prematurely.
Nothing in the record supports the majority's implied finding that none of the rooms could be grandfathered as a permitted conditional tourist use. Indeed, neither the zoning administrator nor the superior court bothered to determine how many rooms might have been used historically as tourist rooms because of their erroneous belief that the HCO barred any tourist use from qualifying as a lawful permitted conditional use. (See maj. opn., ante, 117 Cal.Rptr.2d at p. 280, 41 P.3d at p. 96.) Similarly, the Board of Permit Appeals, in affirming the zoning administrator, apparently found it sufficient that the San Remo was a residential hotel "at least in part."
The majority's reliance on the unproven assumption that no rooms could be grandfathered as a permitted conditional use is all the more puzzling given that the opinion elsewhere is quite cognizant of the prospect that some rooms in the same building may be subject to differing classifications. As the majority explains, we must "consider separately each use in a multiple-use structure," such as the San Remo, in classifying uses "for purposes of neighborhood commercial district zoning." (Maj. opn., ante, 117 Cal.Rptr.2d at p. 283, 41 P.3d at p. 101, citing S.F. Planning Code, § 703.2, subd. (b)(1).) The majority also recognizes that "[t]he administrative record shows that both residential and tourist rentals were significant uses of the San Remo Hotel at the relevant times." (Maj. opn., ante, 117 Cal.Rptr.2d at p. 281, 41 P.3d at p. 97.) Accordingly (and as the majority acknowledges), tourist use at the San Remo would qualify as a permitted conditional use—and is grandfathered under the Planning Code—"to the extent it lawfully existed when the current laws' restrictions came into effect, but does not qualify to the extent plaintiffs propose to significantly alter or expand it." (Id. at p. 283, 41 P.3d at p. 99, italics added.)
The majority thus appears to recognize not only that the critical question here is the number of tourist rooms that should be grandfathered as a permitted conditional use, but also that the current record is inadequate to ascertain that number. For example, the zoning administrator described the annual unit usage reports from 1982 to 1992 as showing residents occupying between 25 and 57 of the designated residential units. "Even if only the 25-57 units actually shown to be occupied by residents were designated as residential units," the zoning administrator explained, "[plaintiffs] would still be required to procure a conditional use permit to convert them under the terms of Planning Code section 178(c)." (Italics added.) Yet, as the majority recognizes, the number of eligible rooms "during the relevant period" is "not clearly answered" by the zoning administrator's aggregation of usage reports over a 10 year period. (Maj. opn., ante, 117 Cal.Rptr.2d at p. 283, 41 P.3d at p. 101.) Plaintiffs, for their part, offered evidence that no more than 10 to 20 percent of the hotel's room had been rented to long-term residents, which would fix the number of rooms to be converted well below the number suggested by the zoning administrator. In their complaint, they allege that no more than nine rooms should have been deemed residential.
As interesting as this dispute may be, it is beyond cavil that the current record is insufficient to resolve how many tourist rooms might be grandfathered as a permitted conditional use. Under the circumstances, a remand is appropriate to enable factual findings to be made regarding the actual use of the hotel during the relevant period. On remand, the City would also be free to argue that plaintiffs had discontinued or abandoned any permitted conditional tourist use they are able to establish. "`[Abandonment of a nonconforming use ordinarily depends upon a concurrence of two factors: (1) An intention to abandon; and (2) an overt act, or failure to act, which carries the implication the owner does not claim or retain any interest in the right to the nonconforming use (8A McQuillin, [Municipal Corporations (3d ed.1994)], § 25.192; 1 Anderson, American Law of Zoning, § 6.58). Mere cessation of use does not of itself amount to abandonment although the duration of nonuse may be a factor in determining whether the nonconforming use has been abandoned (101 C.J.S. Zoning § 199).'" (Hansen Brothers Enterprises, Inc. v. Board of Supervisors (1996) 12 Cal.4th 533, 569, 48 Cal.Rptr.2d 778, 907 P.2d 1324; see S.F. Planning Code, § 178, subd. (d) [permitted conditional uses deemed abandoned if discontinued for three years]; S.F. Admin. Code, § 41.19(a)(1) [a tourist unit may be rented to a permanent resident without changing the legal status of the unit]; cf. Tenderloin Housing Clinic, Inc. v. Astoria Hotel (2000) 83 Cal.App.4th 139, 144-145, 98 Cal.Rptr.2d 924.) The current record, however, renders it impossible to determine which rooms, if any, could be rented to tourists as a permitted conditional use and which rooms, if any, have abandoned or discontinued that permitted conditional use. How the majority, which is plainly aware of the significance of the hotel's historical use and the inadequacy of the record on that point, can do anything other than order a remand is a mystery.
In sum, the answer to the question framed by the majority—"Did San Francisco Properly Require Plaintiffs to Obtain a Conditional Use Permit for Full Tourist Use of the Hotel?"—is a conditional yes. The need to obtain a permit exists only for those rooms for which plaintiffs cannot establish tourist rental as a permitted conditional use, which is precisely the issue left unresolved by the majority. In my view, the writ petition should be granted in part and the matter remanded to permit the superior court or the appropriate administrative agency to take evidence concerning actual tourist use and to resolve any claims that tourist use was abandoned or discontinued. The majority's abrupt termination of the litigation grants the City a windfall housing replacement fee for each room that further proceedings would have revealed to be grandfathered as a permitted conditional tourist use.
I agree with the majority that in-lieu fees assessed under the HCO are not subject to the "rough proportionality" test articulated in Dolan v. City of Tigard (1994) 512 U.S. 374, 114 S.Ct. 2309, 129 L.Ed.2d 304 (Dolan). Dolan envisioned that some "land use regulations" would not be subject to the "rough proportionality" test. (Id. at p. 385, 114 S.Ct. 2309.) To identify which land use regulations would be subject to the more stringent test, the court relied on two "relevant" distinctions: between "an adjudicative decision to condition the [owner's] application for a building permit on an individual parcel" and "essentially legislative determinations classifying entire areas of the city," and between "a requirement that [the owner] deed portions of the property to the city" and "a limitation on the use [the owner] might make of her own parcel." (Ibid., italics added.)
In Ehrlich v. City of Culver City (1996) 12 Cal.4th 854, 50 Cal.Rptr.2d 242, 911 P.2d 429 (Ehrlich), this court unanimously concluded that the "rough proportionality" test applied when "special, discretionary permit conditions on development by individual property owners" (id. at p. 881, 50 Cal.Rptr.2d 242, 911 P.2d 429 (plur. opn. of Arabian, J.); id. at p. 912, 50 Cal.Rptr.2d 242, 911 P.2d 429 (cone. & dis. opn. of Werdegar, J.)) were "adjudicatively imposed" (id. at p. 906, 50 Cal.Rptr.2d 242, 911 P.2d 429 (cone. & dis. opn. of Kennard, J.); id. at p. 891, 50 Cal.Rptr.2d 242, 911 P.2d 429 (cone. opn. of Mosk, J.)). Here, as the majority notes, the in-lieu fee is a product of "generally applicable legislation" (maj. opn., ante, 117 Cal.Rptr.2d at p. 289, 41 P.3d at p. 104) and its calculation is subject to "no meaningful government discretion." (Id. at p. 289, 41 P.3d at p. 104.) Under those circumstances, the in-lieu fee here must be viewed as one of those land use regulations that is not subject to the "rough proportionality" test.
This much is sufficient to answer "no" to the main question the City presented in its review petition: "Where a legislatively adopted impact fee applies equally to 500 residential hotels and 18,000 residential hotel units, is it nevertheless a particularized' exaction subject to heightened scrutiny' because it does not apply to every property in the city?" Although the majority might have stopped the takings analysis at that point, it seems prudent to me to discuss, as the majority does, the legal standard that does apply to the in-lieu fee here, namely that "[a] land use regulation does not effect a taking if it `substantially advances legitimate state interests'...." (Dolan, supra, 512 U.S. at p. 385, 114 S.Ct. 2309.)
Admittedly, this test is not easy of application. The Supreme Court acknowledges that it has not provided "a thorough explanation of the nature or applicability of the requirement that a regulation substantially advance legitimate public interests" (Monterey v. Del Monte Dunes at Monterey, Ltd. (1999) 526 U.S. 687, 704, 119 S.Ct. 1624, 143 L.Ed.2d 882 (Del Monte Dunes)) other than to distinguish this requirement from that used by the high court in due process and equal protection claims. (See ibid., citing Nollan v. California Coastal Comm'n (1987) 483 U.S. 825, 834-835, 107 S.Ct. 3141, 97 L.Ed.2d 677, fn. 3 (Nollan).) As Nollan stated in that footnote, "our opinions do not establish that these standards are the same as those applied to due process or equal protection claims." (Nollan, supra, 483 U.S. at pp. 834-835, fn. 3, 107 S.Ct. 3141.) Rather, takings jurisprudence has diverged from due process and equal protection both in "verbal formulations" and in application. (Ibid.) "[T]here is no reason to believe (and the language of our cases gives some reason to disbelieve) that so long as the regulation of property is at issue the standards for takings challenges, due process challenges, and equal protection challenges are identical." (Ibid.; see generally Santa Monica Beach, Ltd. v. Superior Court, (1999) 19 Cal.4th 952, 1018-1021, 81 Cal.Rptr.2d 93, 968 P.2d 993 (dis. opn. of Chin, J.) (Santa Monica Beach).)
Thus, to the extent that the majority suggests that the property owner must prove the land use regulation is arbitrary to prevail on a takings claim as opposed to a due process claim (see maj. opn., ante, 117 Cal.Rptr.2d at p. 294, fn. 16, 41 P.3d at p. 108, fn. 16, quoting Dolan, supra, 512 U.S. at p. 391, fn. 8, 114 S.Ct. 2309), it is not faithful to the distinction the high court has drawn between those two legal doctrines. For the most part, however, the majority takes pains to distinguish the requirement under the takings clause that a land use regulation "substantially advance[] legitimate state interests" from the requirement of due process and equal protection that a regulation be "not arbitrary." To pass scrutiny under the takings clause, the majority says that in-lieu fees "must bear a reasonable relationship, in both intended use and amount, to the deleterious public impact of the development," although "the relationship between means and ends need not be so close or so thoroughly established for legislatively imposed fees as for ad hoc fees," which are subject to the "rough proportionality" test. (Maj. opn., ante, 117 Cal.Rptr.2d at p. 291, 41 P.3d at p. 106.) Although this formulation makes plain that something more is required than mere rational-basis review, its meaning is still opaque. The defect, I submit, is that the majority's test is too much defined by what it is not, rather than by what it is. For the courts who will be called upon to apply this standard, we must be more illuminating.
The majority's formulation correctly describes the subjects of the inquiry—i.e., the governmental regulation and the public impact of the development—as well as the intensity of the relationship between them—i.e., a reasonable relationship. What is missing is a description of the nature of the relationship between the public impact of the development and the governmental regulation. On this point, I find helpful the concurring and dissenting opinion in Pennell v. San Jose (1988) 485 U.S. 1, 15-24, 108 S.Ct. 849, 99 L.Ed.2d 1 (cone. & dis. opn. of Scalia, J.). Pennell involved the kind of land use regulation that, like the in-lieu fees here, is not subject to the "rough proportionality" test. (See Santa Monica Beach, supra, 19 Cal.4th at p. 968, 81 Cal.Rptr.2d 93, 968 P.2d 993.) Justice Scalia, joined by Justice O'Connor, observed that "[t]raditional land use regulation (short of that which totally destroys the economic value of property) does not violate this [takings clause] principle because there is a cause-and-effect relationship between the property use restricted by the regulation and the social evil that the regulation seeks to remedy. Since the owner's use of the property is (or, but for the regulation, would be) the source of the social problem, it cannot be said that he has been singled out unfairly." (Pennell v. San Jose, supra, 485 U.S. at p. 20, 108 S.Ct. 849, italics added.)
From Justice Scalia's separate opinion, it is apparent that the missing element in the majority's formulation is the causal connection between the property use restricted by the regulation and the social evil that the regulation seeks to remedy. Thus, I would reformulate the standard as follows: The in-lieu fee does not violate the takings clause so long as (1) there is a cause-and-effect relationship between the owner's desired use of the property and the social evil that the fee seeks to remedy, and (2) the fee is reasonably related in both intended use and amount to that social evil. This two-part standard best implements the high court's broadly stated requirement that the fee substantially advance legitimate state interests.
The majority, after announcing the correct standard, strays beyond the questions presented and applies the standard to some of the claims in plaintiffs' complaint and then, without any additional discussion, dismisses the remaining claims by affirming the trial court's judgment sustaining the demurrer. I would refrain from reaching the merits of these selected takings claims and, without analysis or even an acknowledgement of doing so, from summarily denying the others. Well-settled principles of appellate review counsel us to remand the matter to the lower courts to apply the correct legal standard in the first instance.
The most immediate reason for remanding to the lower courts, of course, is that we already need to remand for further factual findings to determine the number of rooms that require further permitting before they may be offered to tourists. When that is completed, plaintiffs will need to choose anew whether and, if so, how to satisfy the housing replacement requirement, "whether by constructing or bringing onto the market new units; by sponsoring such construction by a public or nonprofit private housing developer; or by paying, in-lieu of such construction, a fee to a designated City housing fund." (Maj. opn., ante, 117 Cal.Rptr.2d at p. 289, 41 P.3d at p. 104.) Should plaintiffs choose again to pay the in-lieu fee, the appropriate City agency will need to recalculate it, taking into account the correct number of units and their replacement cost. (See ibid.) Only if plaintiffs then challenge the fee imposed will we be presented with an actual case or controversy that resembles the one the majority addresses here.
Even if we were not already remanding for further factual development involving the petition for writ of administrative mandate, a remand to permit the Court of Appeal to apply the correct legal standard to plaintiffs' claims would be the prudent course. The majority finds, and I agree, that the Court of Appeal erred in analyzing plaintiffs' as-applied takings challenge under a heightened scrutiny standard. (Maj. opn., ante, 117 Cal.Rptr.2d at pp. 289, 290, 41 P.3d at pp. 103-104, 105.) It is our practice, where a lower court has applied an incorrect legal standard, to remand for application of the correct standard, even when a remand is not required for other reasons. (E.g., Yamaha Corp. of America v. State Bd. of Equalization (1998) 19 Cal.4th 1, 15, 78 Cal.Rptr.2d 1, 960 P.2d 1031 [where the Court of Appeal applied an erroneous standard, "regard for the structure of appellate decisionmaking suggests that the case should be returned to the Court of Appeal"]; id. at p. 25, 78 Cal.Rptr.2d 1, 960 P.2d 1031 (cone. opn. of Mosk, J, joined by George, C.J. and Werdegar, J.) ["It is therefore appropriate to remand to the Court of Appeal for reconsideration in light of the proper standard of review"]; see also People v. Cox (2000) 23 Cal.4th 665, 677-678 & fn. 7, 97 Cal.Rptr.2d 647, 2 P.3d 1189; Ramirez v. Yosemite Water Co. (1999) 20 Cal.4th 785, 803, 85 Cal.Rptr.2d 844, 978 P.2d 2; People v. Breverman (1998) 19 Cal.4th 142, 164, 178-179, 77 Cal.Rptr.2d 870, 960 P.2d 1094; People v. Cahill (1993) 5 Cal.4th 478, 510, 20 Cal.Rptr.2d 582, 853 P.2d 1037.) There is no reason to deviate from our practice in this case. Indeed, the justifications for adhering to our traditional practice are numerous and compelling.
First, no hardship exists to warrant our extraordinary intervention to bring an abrupt close to the litigation. Plaintiffs have done everything the City has ordered them to do: they have secured the permits to rent to tourists and have paid the $567,000 housing replacement fee. The only issue in the litigation, as conceded by the City at oral argument, is whether plaintiffs will get some or all of their money back-and the majority's approach plainly does not aid plaintiffs. Moreover, the majority should not be under any illusion that sustaining the demurrer will bring an end to a decade of litigation over that issue. Plaintiffs have reserved their federal claims and, if rebuffed here, will resume their federal litigation, which is now subject to Pullman abstention. (See The San Remo Hotel v. City and County of San Francisco (9th Cir.1998) 145 F.3d 1095, 1106 & fn. 7.)
Second, remand would give us, a reviewing court, the benefit of a reasoned decision applying the correct standard to the merits of plaintiffs' claims. The Court of Appeal declined to address plaintiffs' facial challenge on the grounds that plaintiffs "failed to seek leave of court to replead such causes of action" and that "the present state of the pleadings is insufficient to allow us to fully assess the ultimate legal validity of the facial constitutionality of the HCO." The trial court did purport to reach the merits, but relied solely on Terminal Plaza Corp. v. City and County of San Francisco, supra, 177 Cal.App.3d 892, 223 Cal.Rptr. 379 and Bullock v. City and County of San Francisco (1990) 221 Cal.App.3d 1072, 271 Cal.Rptr. 44. Yet, neither Terminal Plaza nor Bullock addresses the "substantially advance" branch of takings analysis. As for the as-applied challenges, the Court of Appeal applied the wrong standard, and the trial court failed to reach the merits of these claims at all, choosing instead to reject the claims categorically on the authority of Pfeiffer v. City of La Mesa (1977) 69 Cal.App.3d 74, 137 Cal.Rptr. 804. The Court of Appeal held Pfeiffer inapplicable for several reasons, none of which the City challenges here. (See maj. opn., ante, 117 Cal.Rptr.2d at p. 280, fn. 9, 41 P.3d at p. 96, fn. 9.) In sum, only one category of claims has even been addressed on the merits by a lower court—the as-applied claims by the Court of Appeal—and that court applied what we have now determined to be the wrong standard. I do not view these circumstances as crying out for us to deviate from our practice of remanding to permit the lower courts to apply the correct standard in the first instance.
Third, remand for application of the correct standard would be consistent with the way the parties have framed the issues and the relief the City has sought here. The questions presented in the City's petition for review do not invite us to resolve the merits of plaintiffs' claims. Indeed, when asked at oral argument what this court should do if it adopts (as it has) a standard not urged by either party, the City's counsel replied, "I assume the court would remand for a consideration by the trial court of what standard of review the court would order to be applied."
Fourth, remand is appropriate to permit the lower courts to address the claims articulated in the complaint that are not discussed by the majority. The majority purports to affirm the trial court's judgment sustaining the demurrer to the entire complaint, yet limits its discussion only to a few facial and as-applied challenges to the HCO. Our task on demurrer is to determine whether "the complaint states a cause of action under any theory, regardless of the title under which the factual basis for relief is stated." (Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 38, 77 Cal.Rptr.2d 709, 960 P.2d 513.) Viewed in this light, it is apparent that this complaint articulates a number of potential takings and other claims, none of which has yet been addressed by the majority or rejected by the Court of Appeal, including (1) that the lifetime leases effect a physical taking (see Yee v. Escondido (1992) 503 U.S. 519, 528, 112 S.Ct. 1522, 118 L.Ed.2d 153 ["A different case would be presented were the statute, on its face or as applied, to compel a landowner over objection to rent his property or to refrain in perpetuity from terminating a tenancy"]); (2) that the HCO and fee deprived plaintiffs of their reasonable investment-backed expectations; (3) that the HCO denies plaintiffs all economically viable use of the property, inasmuch as a surplus of vacant residential hotel rooms already exists in San Francisco; and (4) that state law preempted the HCO.
I can think of no reason for the majority's failure to address these claims, other than the fact that none of them can even remotely be shoehorned into the issues presented by the City's petition. But the City's decision to limit issues for review can hardly be deemed a license for us to dismiss plaintiffs' entire complaint without comment, especially where viable issues remain. To affirm the demurrer here would punish plaintiffs for complying with rule 29.3(c) of the California Rules of Court, which tells the parties that "[u]nless otherwise ordered, briefs on the merits shall be confined to those issues, and issues fairly included in them." The lesson here, if there is one, is that litigants in this court should be careful to brief against any conceivable contingency that could jeopardize any favorable ruling below, even if the arguments fall well outside the questions presented. I confess I do not think this is a good idea.
I would therefore affirm the judgment of the Court of Appeal to the extent that it ordered a remand for further proceedings relating to the petition for writ of administrative mandate and affirmed the imposition of nominal penalties under the City's cross-complaint. I would reverse the Court of Appeal to the extent that it applied a heightened-scrutiny standard to plaintiffs' taking claims and would then remand the cause to enable the Court of Appeal to apply the correct legal standard. To the extent the majority prevents plaintiffs from demonstrating their entitlement to writ relief, prematurely analyzes plaintiffs' as-applied takings claims, and summarily disposes of plaintiffs' other claims without any analysis whatsoever, I respectfully dissent.
I CONCUR: CHIN, J.
Americans are a diverse group of hard-working, confident, and creative people molded into a nation not by common ethnic identity, cultural legacy, or history; rather, Americans have been united by a dream—a dream of freedom, a vision of how free people might live. The dream has a history. The idea that property ownership is the essential prerequisite of liberty has long been "a fundamental tenet of Anglo American constitutional thought." (Ely, The Guardian of Every Other Right (1998) p. 43.) "Indeed, the framers saw property ownership as a buffer protecting individuals from government coercion. Arbitrary redistribution of property destroyed liberty, and thus the framers hoped to restrain attacks on property rights." (Ibid.) "Property must be secured, or liberty cannot exist" (Adams, A Balanced Government (1790) in Discourses on Davila (1805), reprinted in 6 Works of John Adams (1851 ed.) p. 280), because property and liberty are, upon examination, one and the same thing.
Private property is in essence a cluster of rights inuring to the benefit of the owner, freely exchangeable in accordance with the terms of private agreements, and recognized and protected by common consent. In the case of real property, this cluster of rights includes the right to exclude persons from certain physical space. In the case of intellectual property, it may include the right to employ a valuable method or process to the exclusion of others. In other words, private property represents zones of individual sovereignty—regions of autonomy within which we make our own choices.
But private property, already an endangered species in California, is now entirely extinct in San Francisco. The City and County of San Francisco has implemented a neo-feudal regime where the nominal owner of property must use that property according to the preferences of the majorities that prevail in the political process—or, worse, the political powerbrokers who often control the government independently of majoritarian preferences. Thus, "the lamb [has been] committed to the custody of the wolf." (6 The Works of John Adams, supra, at p. 280.) San Francisco has redefined the American dream. Where once government was closely constrained to increase the freedom of individuals, now property ownership is closely constrained to increase the power of government. Where once government was a necessary evil because it protected private property, now private property is a necessary evil because it funds government programs.
I. The San Francisco Planning Commission's Zoning Decision Restricting Plaintiffs' Ability to Convert their Hotel to Tourist Use Constitutes a Taking Requiring Compensation
The City and County of San Francisco (the City), like other cities, seeks to provide affordable housing to its low-income residents. The most egalitarian way to achieve this goal would be to distribute the cost of subsidies as broadly as possible, but the forces attacking private property in California—though claiming the moral high ground—have proved themselves anything but egalitarian in their approach. In 1981, the City enacted the Residential Hotel Unit Conversion and Demolition Ordinance (S.F.Admin.Code, ch. 41) (the HCO; all citations to HCO are to chapter 41 of the San. Francisco Administrative Code), the details of which are summarized in the majority opinion, ante, 117 Cal.Rptr.2d at pp. 274 through 275, 41 P.3d at pp. 91 through 92. The HCO places the burden of providing low-income housing disproportionately on a relatively small group of hotel owners. These hotel owners certainly did not cause poverty in San Francisco; indeed, for a long time they voluntarily helped relieve the problem by leasing some or all of their rooms on a long-term basis to low-income residents. But as the economy of the City shifted, this residential use of their hotel rooms became increasingly unprofitable, and hotel owners began to abandon the residential rental business. It was then that the City, facing constitutional constraints on taxation and other sources of revenue, began to see the hotel owners as the most convenient—if not the most equitable-off-budget solution to its housing problems. If the City were devising a tax that would subsidize low-cost housing, I strongly doubt it would limit its tax to the owners of a few hundred residence hotels, but in the often surreal world of political expedience, these ill-fated business people were ordered to use their property for the benefit of the poor, thereby greatly depressing the market value of that property.
The express purpose of the HCO was to preserve the City's stock of low-income residential housing by requiring hotel owners to continue leasing their rooms as residences, or to replace those residential units if they chose to convert the rooms to tourist use. (HCO, §§ 41.2, 41.3.) Obviously, the HCO is facially unconstitutional. If a person took my car and asked a ransom for its return, he or she would be guilty of theft. But what if the City, seeking to provide transportation to the poor, orders me to operate an informal carpool, or if I prefer, to buy the City a replacement car? When presented with a similar hypothetical at oral argument, the San Francisco City Attorney declared such a rule a mere "regulation of use." I disagree. The essence of private property is the right to use that property as one sees fit and for one's own advantage. The police power permits the government to regulate that use so as to promote health, safety, and the general welfare, but it does not permit the government to achieve its social agenda by ordering a political minority to dedicate its property to the benefit of a group the government wishes to favor. As I explain in more detail in part II. below, such a regulation amounts, in practical effect, to a transfer of title and requires the government to pay its way.
But constitutional issues aside, the City had another problem with its HCO. In 1985, the state Legislature enacted the Ellis Act, which unequivocally guarantees the right of property owners to abandon the residential rental business. Government Code section 7060, subdivision (a), provides: "No public entity ... shall, by statute, ordinance, or regulation, or by administrative action implementing any statute, ordinance or regulation, compel the owner of any residential real property to offer, or to continue to offer, accommodations in the property for rent or lease." If this clear language left any doubt about the continuing viability of the HCO, that doubt was finally resolved against the City in Bullock v. City and County of San Francisco (1990) 221 Cal.App.3d 1072, 1102, 271 Cal.Rptr. 44 (Bullock), which held that the Ellis Act preempts the HCO. "We conclude," said the court in Bullock, "that [the HCO] is preempted by the Ellis Act and is therefore invalid to the extent it is applied to prevent plaintiff from going out of the residential hotel business." (Bullock, at p. 1102, 271 Cal.Rptr. 44, italics added.) In other words, state law expressly permits property owners to do what the HCO bars them from doing: it permits them to stop leasing to residents.
The City, however, was unwilling so easily to concede defeat. The Ellis Act affirms the continuing power of public entities "to grant or deny ... zoning ... approvals." (Gov.Code, § 7060.1, subd. (b).) This provision seems reasonable on its face: property owners are free to stop leasing to residents, but they still must obey zoning laws regulating the new use to which they intend to put their property. (See also Gov.Code, § 7060.7.) Conveniently, the City amended its zoning laws shortly after the Ellis Act became law. As related in the majority opinion (maj. opn., ante, 117 Cal.Rptr.2d at p. 276, 41 P.3d at p. 93), one effect of this change was to require the owners of the San Remo Hotel to obtain a conditional use permit before "intensif[ying]" any use of their property as a tourist hotel. (S.F. Planning Code, § 178, subd. (c).) The parties dispute the extent to which the rooms in the San Remo Hotel were ever, in fact, being used as residences, but as the majority points out (maj. opn., ante, 117 Cal.Rptr.2d at pp. 281-285, 41 P.3d at pp. 97-100), at least some of those rooms were historically used as residences, and to the extent the owners sought to convert those rooms to tourist use, the change required a permit under the new zoning ordinance. In short, the City put in place a zoning mechanism by which it could try to achieve the goals of its preempted HCO, if it chose to do so.
But the City had to proceed cautiously. Bullock made clear that the City could not use zoning laws pretextually to bar landlords from exercising their rights under the Ellis Act. As the court stated, "[nothing in the Ellis Act gives any landlord invoking its protection the unilateral power to effect what amounts to a rezoning of his property.... [¶] The City is ... not precluded from seeking to have enjoined a violation of [zoning] ordinances ..., so long as this claim is not used as a pretext for halting [the property owner's] departure from the residential hotel business." (Bullock, supra, 221 Cal.App.3d at p. 1104, 271 Cal.Rptr. 44, italics added.) Implicitly conceding that the Ellis Act is in direct conflict with the HCO, the majority argues (maj. opn., ante, 117 Cal.Rptr.2d at pp. 284-285, 41 P.3d at p. 100) the Ellis Act has no effect here because the record does not establish that plaintiffs complied with its notice requirements. (See Gov.Code, § 7060.4.) But the power of local governments to implement the Ellis Act by requiring notice in no way negates the fact that state law has preempted the City from using zoning as a way to discourage property owners from exiting the residential rental business. Government Code section 7060.4 permits local governments to enact notice requirements, but it does not permit those governments to enact zoning restrictions that abrogate the very protections the Ellis Act affords. Therefore, whether plaintiffs followed the notice requirements of the Ellis Act is beside the point; the state has occupied this area of law, and the City may not enact and enforce contrary laws. Nevertheless, after the City amended its zoning laws, the preempted HCO was poised to become the ghost that drove zoning decisions in San Francisco.
Here, for example, the owners of the San Remo Hotel sought to convert their hotel to full tourist use. The City's Planning Department told them that—consistent with the recent amendments to the zoning laws—they would need a conditional use permit. Whether to issue a conditional use permit is an adjudicative decision that is exercised at the discretion of the planning commission (S.F. Planning Code, §§ 303, 316, 316.8), and the planning commission exercised its discretion here by conditioning the San Remo Hotel permit on, among other things, compliance with the preempted HCO. The owners of the San Remo Hotel met this condition by paying, in protest, a $567,000 "in lieu fee" (representing a portion of the appraised cost of building replacement housing) and brought this action alleging, among other things, a taking without just compensation in violation of the state Constitution.
This constellation of facts makes this case indistinguishable from Ehrlich v. City of Culver City (1996) 12 Cal.4th 854, 50 Cal.Rptr.2d 242, 911 P.2d 429 (Ehrlich). Ehrlich addressed the same problem that the United States Supreme Court recognized in Nollan v. California Coastal Comm'n (1987) 483 U.S. 825, 107 S.Ct. 3141, 97 L.Ed.2d 677 (Nollan) and Dolan v. City of Tigard (1994) 512 U.S. 374, 114 S.Ct. 2309, 129 L.Ed.2d 304 (Dolan). When a government agency has discretionary authority to permit or prohibit a new use of property, the risk arises that governmental greed will consciously or unconsciously distort the decisionmaking process, causing the agency to exact a condition from the property owner that has nothing to do with mitigating the effects of the proposed new use. This sort of regulatory leveraging, taken to its extreme, might cause a government to impose "stringent land-use regulation which [it] then waives to accomplish other purposes" (Nollan, at p. 837, fn. 5, 107 S.Ct. 3141), and this concern warrants a more searching inquiry by a reviewing court than might otherwise be appropriate.
In Nollan, for example, a California agency conditioned a permit to develop beachfront property on dedication of a public easement. The easement, which permitted the public to cross the property to gain access to the ocean, "utterly fail[ed] to further the end" of mitigating the impact of the proposed development on ocean views, and therefore lacked the "essential nexus" that the federal Constitution required and amounted to "extortion.'" (*Nollan, supra,* 483 U.S. at p. 837, 107 S.Ct. 3141.) Similarly, in *Dolan* the City of Tigard conditioned a permit to greatly expand a retail sales complex on dedication of a strip of property as a pathway for pedestrians and bicycles. The high court held that a permit condition must be "rough[ly] proportional[]'" "in nature and extent" to mitigating "the impact of the proposed development" (Dolan, supra, 512 U.S. at p. 391, 114 S.Ct. 2309, fn. omitted), and the City of Tigard had failed "to quantify its findings" that the pathway would mitigate increases in traffic. (Id. at p. 395, 114 S.Ct. 2309.) In Ehrlich, we unanimously extended the principle of Nollan and Dolan to a case in which a city demanded a monetary fee from a developer rather than a dedication of an interest in real property, noting that the same risk of governmental abuse was present. (Ehrlich, supra, 12 Cal.4th at p. 876, 50 Cal.Rptr.2d 242, 911 P.2d 429 (plur. opn. of Arabian, J.); id. at pp. 899-901, 50 Cal.Rptr.2d 242, 911 P.2d 429 (cone. opn. of Mosk, J.); id. at p. 907, 50 Cal.Rptr.2d 242, 911 P.2d 429 (conc. & dis. opn. of Kennard, J.); id. at p. 912, 50 Cal.Rptr.2d 242, 911 P.2d 429 (conc. & dis. opn. of Werdegar, J.).) The majority reaffirms the holding of Ehrlich today. (Maj. opn., ante, 117 Cal.Rptr.2d at p. 287, 41 P.3d at pp. 102-103.)
Here, as in Ehrlich, a public agency (the City's Planning Commission) has made a discretionary adjudicative decision with respect to a specific permit application. Contrary to the argument of the majority (maj. opn., ante, 117 Cal.Rptr.2d at pp. 289-290, 41 P.3d at pp. 103-105), this case does not involve a legislatively imposed fee for which the risks of abuse are arguably held in check by the political process. (Maj. opn., ante, 117 Cal.Rptr.2d at p. 291, 41 P.3d at p. 105.) Rather, in an adjudicative proceeding concerning a single property owner's permit request, the planning commission chose to require HCO compliance and thereby used the leverage it gained by regulating commercial uses of property to exact a $567,000 fee. On these facts, the fee must be roughly proportional in nature and extent to mitigating the impact of the proposed new use of the property. (Ehrlich, supra, 12 Cal.4th at p. 876, 50 Cal.Rptr.2d 242, 911 P.2d 429 (plur. opn. of Arabian, J.); id. at pp. 899-901, 50 Cal.Rptr.2d 242, 911 P.2d 429 (conc. opn. of Mosk, J.); id. at p. 907, 50 Cal.Rptr.2d 242, 911 P.2d 429 (conc. & dis. opn. of Kennard, J.); id. at p. 912, 50 Cal.Rptr.2d 242, 911 P.2d 429 (conc. & dis. opn. of Werdegar, J.).) In short, because we are dealing with a discretionary decision of the planning commission rather than direct enforcement of the HCO, the government's decision here, like the decision at issue in Ehrlich, was adjudicative.
The majority tries to sidestep this gaping hole in its argument with a footnote asserting that under applicable zoning laws "conversion of residential rooms to commercial use is unconditionally prohibited above the first floor in the North Beach district except insofar as permitted by the HCO (S.F. Planning Code, §§ 722.38, 790.84)." (Maj. opn., ante, 117 Cal.Rptr.2d at p. 289, fn. 11, 41 P.3d at p. 104, fn. 11.) The majority concludes: "The planning commission, therefore, had no discretion to permit such change in use absent HCO compliance." (Ibid.) In other words, the majority argues the planning commission's decision here was legislative, not adjudicative, thereby permitting the majority to exploit the exception it reads into Ehrlich for legislatively created permit fees.
First, the majority simply misreads the City's Planning Code. San Francisco Planning Code section 722.38 prohibits conversion from residential to nonresidential use above the first floor, but section 790.84 of that code does not limit the exception from this prohibition to cases where the property owner complies with the HCO. Rather, section 790.84 creates an exception for conversions that are "defined and regulated in [the HCO]." The San Francisco Planning Code therefore remains neutral with respect to HCO compliance. It simply provides that its flat prohibition on conversions does not apply when the HCO applies, thereby giving space within which the HCO can operate. Nothing in the Planning Code requires the planning commission to enforce the HCO, nor does the Planning Code state that conversions are prohibited except "as permitted by the HCO." (Maj. opn., ante, 117 Cal.Rptr.2d at p. 289, fn. 11, 41 P.3d at p. 104, fn. 11.) In other words, the Planning Code leaves a regulatory gap with respect to conversions regulated in the HCO, and the commission has, in its discretion, chosen to fill that gap by requiring HCO compliance. Its decision was not compelled by any legislative rule, and therefore it is no different than the decision at issue in Ehrlich. At the very least, the legislative rule was ambiguous, and the planning commission's interpretation of the rule was in that sense adjudicative.
Second, the majority's exception for legislatively created permit fees is mere sophism, particularly where the legislation affects a relatively powerless group and therefore the restraints inherent in the political process can hardly be said to have worked. (Cf. United States v. Carolene Products Co. (1938) 304 U.S. 144, 152, fn. 4, 58 S.Ct. 778, 82 L.Ed. 1234.) If the agency in Nollan had passed a rule requiring all beachfront property owners to dedicate an easement as a condition of developing their properties, those easements would have no better mitigated the effects of development (and they would have been no less objectionable) than the easement that the agency exacted adjudicatively. Of course, when the government may prohibit a certain use of property entirely, it may opt instead to place conditions on that use (Nollan, supra, 483 U.S. at p. 836, 107 S.Ct. 3141), but the conditions must be related in some real way to the justification advanced for a complete prohibition. (Id. at p. 837, 107 S.Ct. 3141.) Otherwise, the government has transformed the police power into an efficient way to raise money by regulating political minorities and then selling exemptions from the regulatory scheme, without any real intent to advance the scheme's purported purpose. It becomes "as if California law forbade shouting fire in a crowded theater, but granted dispensations to those willing to contribute $100 to the state treasury." (Ibid.) The government, in effect, says: We have the power; therefore, pay us to leave you alone. By any measure, that is extortion. Moreover, it turns the takings clause on its head. Instead of the government having to pay compensation to property owners, the government now wants property owners to compensate it to get back the fair value of property the government took away through regulation.
A public agency can just as easily extort unfair fees legislatively from a class of property owners as it can adjudicatively from a single property owner. The nature of the wrong is not different or less abusive to its victims, but the scope of the wrong is multiplied many times over. Therefore, I believe Ehrlich should apply whenever the risk is great that greed for public revenues has driven public regulatory policy. In other words, where a legislative scheme imposes a burdensome fee on a small class of property owners as a condition to buying relief from a regulation, I believe careful judicial scrutiny is appropriate, including finding a close link between the fee and the purpose of the regulation. In light of the majority's decision, however, we can be sure that agencies will now act legislatively, rather than adjudicatively, and thereby insulate their actions from close judicial scrutiny.
In addition, the HCO is structured in such a way that the same sort of discretionary, case-specific decisionmaking that triggered our holding in Ehrlich also takes place under the HCO. The fee that a hotel owner may pay under the HCO so as to buy the right to lease residential rooms to tourists is a fixed portion of the estimated cost of replacing the lost residential housing. (HCO, § 41.13, subd. (a)(4), (5).) Though this cost estimate must be based on two independent appraisals (ibid.), it nevertheless permits a discretionary element to enter into the process, with the result that the City and the property owner inevitably end up in a back-and-forth negotiation over the amount of the fee. Obviously, the City has the upper hand in this negotiation-because it is holding the conversion permit hostage-and therefore the City is free to squeeze as large a fee as possible from the property owner. That dynamic brings into play all the concerns that justified our holding in Ehrlich, and therefore the same careful scrutiny ought to apply.
Finally, and most importantly, the majority fails to appreciate that, if the San Francisco Planning Code somehow requires across-the-board compliance with the HCO, then the Ellis Act preempts that requirement, just as it preempts the HCO itself. The zoning exception to the Ellis Act permits the City to place certain limits on how a property owner may use property, but as Bullock held, the City may not use that zoning power to erect barriers to a property owner's decision to exit the residential rental business, even if the effect is to reduce the residential housing stock of the City. (Bullock, supra, 221 Cal.App.3d at p. 1104, 271 Cal.Rptr. 44.) In other words, the planning commission, acting under the zoning exception to the Ellis Act, might be able to block the owners of the San Remo Hotel from renting more rooms to tourists, assuming its purpose is to limit the number of tourist hotel rooms in the area, but the commission may not do so to protect the City's stock of low-cost residential housing, because that would be inconsistent with the state law right of property owners to stop leasing to residents. Nevertheless, here the majority argues (and the City concedes) that the preservation of low-cost housing was the planning commission's purpose when it required HCO compliance. (See, e.g., maj. opn., ante, 117 Cal.Rptr.2d at pp. 292-298, 41 P.3d at pp. 106-111.) That purpose was simply impermissible under the Ellis Act, and even if it were somehow permissible, the majority acknowledges that at least some rooms at the San Remo Hotel were historically used as tourist rooms (maj. opn., ante, 117 Cal.Rptr.2d at pp. 281-285, 41 P.3d at pp. 97-100,) and therefore it cannot, in any case, justify the planning commission's decision to charge a conversion fee for all rooms. (Cf. id. at pp. 296-297, 41 P.3d at p. 110.)
Of course, despite the Ellis Act problem, the majority and the City have no choice but to assert that the planning commission's purpose was the preservation of residential housing, because if the planning commission had some other purpose, it could not—under any standard of review (rational basis, reasonable relationship, or rough proportionality)—have attached the condition that the owners of the San Remo Hotel take steps to preserve low-cost residential housing. Just as in Nollan, where the easement providing access to the beach was not related in any way to mitigating the obstruction of an ocean view, similarly here the preservation of low-cost housing is not related in any way to mitigating the impact of more tourist hotel rooms in the neighborhood of the San Remo Hotel. In other words, by requiring HCO compliance as a condition for renting more rooms to tourists, the planning commission has revealed its true colors: it does not care about the number of hotel rooms in the area; what it really cares about is preventing property owners from exiting the residential rental business. But this the City simply cannot do under the Ellis Act—if not for the fact that the majority has chosen to turn a blind eye.
II. The HCO is Facially Unconstitutional under the takings clause of the California Constitution
Our takings jurisprudence—both state and federal-has become so labyrinthine and compartmentalized that attempts to find just the right standard for the case often entirely miss the underlying point of the exercise. We speak of ad hoc inquiries, relevant factors, per se takings, and means-end relationships. We chip away at the problem with separate lines of cases addressing distinct issues such as development permits and price controls. And all these efforts, valid as far as they go, leave us still groping for a basic conceptual approach that takes seriously the constitutional prohibition against uncompensated takings of private property. Thus, like the Wizard of Oz, we mystify our audience with the look and feel of great erudition, while concealing the humble reality that we have yet to solve the problem in a satisfactory way.
But, here, we need not consider all these arcane standards and fragmentary theories. These are analytical tools relevant to tough cases—cases in which it is unclear whether property has been taken. This is not a tough case. Here, property unquestionably has been taken. No matter the analysis, the facts of this case come down to one thing—the City and County of San Francisco has expropriated the property and resources of a few hundred hotel owners in order to ameliorate-off budget and out of sight of the taxpayer—its housing shortage. In short, this ordinance is not a matter of efficiently organizing the uses of private property for the common advantage; instead, it is expressly designed to shift wealth from one group to another by the raw exercise of political power, and as such, it is a per se taking requiring compensation.
The majority rejects the legal theories on which the property owners have proceeded, but it fails to confront the more basic issue that prefigures all others: the City has replaced taxation and the provision of public services with a regulation that orders certain people to use their private property to do the government's work. If the relevant case law is sparse, it is only because no public agency has ever been so bold.
"Private property may be taken or damaged for public use only when just compensation ... has first been paid to ... the owner." (Cal. Const., art. I, § 19.) In a simple world where "property" is understood to refer to tangible property and "tak[ing]" is understood to be a formal transfer of title, this constitutional injunction is relatively easy to apply. But such a narrow application of the takings clause would trivialize the right. Restriction of any one of the several rights that constitute private property in effect takes that property. For example, a property owner cares little about the formalities of title possession when the property in question has been rendered nearly valueless by regulations prohibiting its most productive uses. In that case, the regulations have deprived the owner of so many of the rights that originally constituted the property that the property has, in effect, ceased to exist, or it has become a mere empty shell. Furthermore, in a complex and increasingly service—and information—based economy, the constitutional protection of intangible property is just as critical as the protection of physical property was to an agrarian and manufacturing economy.
Nevertheless, in countless ways, government takes property—in the sense of regulating its use—without always having to compensate the owner. In Penna. Coal Co. v. Mahon (1922) 260 U.S. 393, 413, 43 S.Ct. 158, 67 L.Ed. 322 (Penna. Coal Co.), Justice Holmes noted that "[government hardly could go on" if it had to pay its way every time a regulation restricted the use of property. The law has long recognized, for example, that government might, in the exercise of the police power, act to proscribe a nuisance, and in so doing it need not pay compensation. (See, e.g., Civ. Code, § 3479; Code Civ. Proc, § 731.) Holmes spoke of "an average reciprocity of advantage" whereby a property regulation ultimately works for the enrichment of all, though it imposes specific limitations on the use of certain property. (Penna. Coal Co., at p. 415, 43 S.Ct. 158.)
For example, business owners on a popular shopping street might generally agree that their properties would be more attractive, and hence more valuable, if all the businesses used small, attractive signs rather than huge, garish billboards. Nevertheless, without regulation, competitive forces will inevitably cause business signs to become ever larger and more visually intrusive. No business owner wants to be the only one on a shopping street to have a small sign, and transaction costs often prevent owners from coming together to negotiate an agreement that would work to their common advantage. In that case, a regulation that has the immediate effect of reducing property value by restricting sign size, has the indirect effect of enhancing that value for all affected businesses. (See generally Epstein, Takings: Private Property and the Power of Eminent Domain (1985) pp. 195-215.)
A similar justification can be articulated in the case of the regulations proscribing nuisance. For example, if the law prohibits a property owner from operating a slaughterhouse in a residential neighborhood, the immediate effect might be to lower incrementally the value of the regulated property, but the indirect effect is to place that property in a neighborhood rendered more desirable for residential use, thereby enhancing its value. Again the same rationale can be extended to justify zoning and planning regulations that constrain the freedom of developers but enhance all property values over the long term by making cities more attractive and efficient. Finally, when a regulatory scheme creates new value for a property owner by establishing an artificial monopoly—as, for example, might be true in the case of a utility—the government can regulate the profit the property owner gains from its government—created preferential status. All these examples point to the same fundamental principle: property owners, given a choice, will prefer to own property in a community having appropriate and mutually beneficial regulations, because such property has greater value by reason of the regulation. Accordingly, regulatory authority is not inherently confiscatory in all cases.
But the corollary of this rule—one I think is implicit in the takings clause of the state Constitution—is that a regulation is a taking if, rather than promoting "an average reciprocity of advantage" (Penna. Coal Co., supra, 260 U.S. at p. 415), it is merely designed to benefit one class of citizens at the expense of another; that is, if it simply shifts wealth by a raw act of government power. The government, in that case, has deprived the property owner of a right associated with his property, shifting that right to another party, but it has in no sense compensated the owner by enhancing, in some real way, the value of the rights the owner has retained.
In short, it might be perfectly legitimate for the City to help the low-income residents of San Francisco, but it may not do so at the expense of some small class of persons simply by legislating a transfer of property rights. Of course, providing assistance to low-income residents of the community incrementally benefits all members of the community both by removing the blight of homelessness and by representing a general moral good, but here the burden of this common benefit falls so disproportionately on 500 business owners in a city of 776,700 residents that careful judicial scrutiny is warranted. Where the impact is so disproportionate, we cannot say that we have "an acceptable level of assurance that over time the burdens associated with collectively determined improvements will have been distributed `evenly' enough so that everyone will be a net gainer." (Michelman, Property, Utility, and Fairness: Comments on the Ethical Foundations of "Just Compensation" Law (1967) 80 Harv. L.Rev. 1165, 1225, original italics.) Moreover, it simply stretches the police power too far to suggest that the City is somehow regulating the use of property for the common advantage when it redistributes wealth by ordering a political minority to dedicate its property to the benefit of another group. The police power can no more be used in this way than it could be used to order a rich man to give a beggar a dime. Here, the primary beneficiary of the regulation is not the common advantage but the low-income individuals who obtain the inexpensive housing. Laudable as that goal might be, the takings clause precludes the government from achieving the goal by police power regulation.
Were plaintiffs on remand to establish the truth of their allegation that at least 53 of their 62 rooms should be grandfathered as a permitted conditional tourist use, it is certainly plausible that they would not undertake the permitting process for the remaining handful of rooms. Without a remand, however, the majority has approved a procedure in which plaintiffs, no matter the number of rooms sought to be converted, are obligated to pay $567,000. It is difficult to imagine how such a scheme satisfies even the most lax of constitutional tests.