By Jamie Howsley, Attorney & Keenan Ordon-Bakalian, Law ClerkThis article originally appeared in the October 22, 2018 edition of the Daily Journal of Commerce.
When developers build excess capacity for public infrastructure, they are often entitled to reimbursement in the form of system development charge (“SDC”) credits, which then are applied to reduce the cost of building permits. Misunderstandings about eligibility and the actual amount of the credits are among the most vexing problems of real estate development. The Oregon Court of Appeals recently held that oral agreements between developers and local government officials regarding SDC credits are not enforceable. This court decision highlights the financial unknowns facing developers trying to achieve 100 percent credit for street improvements when their lenders expect certainty.
West Hills Development Co. challenged the appropriate amount of SDC credits provided by Washington County for completion of road improvements serving residential development in North Bethany. As conditions of approval for an 85-lot subdivision, Washington County required West Hills to improve two roads which run adjacent to, but not through, the subdivision. After completing construction, West Hills applied for SDC credits of $580,645 for the improvements but later reduced its request to $388,104. The county ultimately awarded total credits of $238,215, which was far less than the total cost of the improvements. West Hills asserted that it and “other Bethany developers” had “understood” that the County would reimburse the total cost of street improvements in North Bethany but that the county was now limiting the credits to the cost of improvements that provided capacity beyond that needed for the development and was not reimbursing storm-water improvements. West Hills thought it had reached an oral agreement with the County and would receive “100 percent” credit for the street improvements and that ORS 223.304(5)(c) allows local governments to provide greater credits to developers than is strictly required.
In the litigation, Washington County insisted that there never was an oral agreement, nor a promise that it later walked back. It did acknowledge that “local governments [have the] latitude to provide a credit that is larger or different than what an applicant would be entitled to receive.” However, the County took the position that even if County staff and North Bethany developers had agreed that street improvements would be fully reimbursable, the staff persons lacked the authority to bind the County to such an agreement. Instead, the County asserted that credit eligibility was to be determined solely by the director of the Washington County Department of Land Use and Transportation and that subordinate county staff lacked the authority to bind the director with respect to credit determinations.
The Court of Appeals ruled that even if the director had authority to delegate credit determinations to subordinate county staff, there was no evidence that he actually did so. “It cannot be said that West Hills had ‘no reason to know’ that county staff lacked authority to commit the county to providing greater credits to West Hills than provided by county code . . . West Hills could not simply assume that ‘county staff’ had authority to enter into an oral agreement that would bind the county,” said the Court.
This decision illustrates the uncertain nature of SDC negotiations. In most cases, the developer must comply with road improvement conditions imposed by subordinate staff under the delegated authority of the department director in order to receive project approval. However, rather than compensate the developer for such improvements, local governments often credit the developer for far less than the developer’s actual costs. The result is that the developer is left holding the bag, while the local government reaps the benefits of the improvements. SDC credits are designed to be a flexible mechanism for developers to recoup the cost of system improvements not necessary to serve their developments. However, the idea that improvements are fully creditable—even when promised—is rarely the case when the bill comes due.
It is paramount for developers to get any promises relating to SDC credits in writing, typically in the form of a development agreement as per ORS 94.504(2). Without a development agreement in hand, the developer will struggle to establish the kind of financial certainty necessary to satisfy lenders that they can complete a project. Unexpected costs disrupt financing. As this court decision shows, oral promises or “handshake deals” are not enforceable, especially when they are made by staff who lack the authority to bind the local government to such agreements.
Although this decision appears to state a clear rule—that developers must apply for credits through the established procedure and obtain a decision from the authorized official—it ignores the realities of negotiations between developers and local government staff. In a perfect world, developers and local governments would resolve SDC credit issues during the land use application to provide financial certainty earlier in the process.
Development is a fluid industry defined by cooperation and regular interaction between the developers, lenders, and local government staff. The situation facing West Hills is common as evidenced by the other North Bethany developers who also believed the County would reimburse the total cost of specified street improvements. Nonetheless, the West Hills decision shows these private investments in public infrastructure may not be reimbursed as planned, which deprives developers and their lenders of certainty. Further, by allowing local governments to chisel the cost of infrastructure improvements adjacent to new developments, despite promises made by their own staff, this decision represents one more government action that increases the cost of housing.
The disparity between the costs incurred by West Hills and the credits approved by Washington County is nearly $2,000 per house. The takeaway? If local government staff makes promises that you intend to rely on, insist on a formal development agreement. A handshake deal may not get it done.