Ballot Measure 37

LAND USE ALERT

TO:	Clients and Other Friends of the Office
FROM:	Paul Vaughan and Steve Cornacchia
DATE:	November 15, 2004
RE:	Ballot Measure 37

Measure 37 was passed by the Oregon voters at the November 2nd election and will become effective on December 2, 2004. The measure raises a number of significant real estate and land use issues that property owners, developers, investors, lenders, and appraisers should understand. The measure also raises a number of questions that are not answered by the text of the measure. Ultimately, those questions will need to be answered by either the legislature or the courts. It is not premature, however, to begin considering the possible opportunities and risks that the measure creates.

This memorandum discusses a number of immediate issues that should be considered by all persons who own or invest in real estate or who are otherwise involved in real estate matters. This memorandum also suggests some strategies that such persons may want to consider in connection with their real estate activities so as to take advantage of Measure 37 opportunities while at the same time mitigating potential risks that may flow as consequence of Measure 37.

General Provisions

Measure 37 provides that if a public entity (which includes the state, a city or a county) enacts or enforces a “land use regulation” that restricts the use of property, and has the effect of reducing the value of the property, the public entity must pay the owner compensation equal to the reduction in value. As an alternative, the public entity may forego enforcement of the regulation against the property (by modifying, repealing or waiving the regulation) rather than paying compensation. The measure broadly defines “land use regulation” to include (i) any statute regulating the use of land, (ii) any administrative rules or statewide land use goals enacted by the Land Conservation and Development Commission, (iii) local government comprehensive plans, zoning ordinances, land division ordinances, and transportation ordinances, and (iv) statutes and administrative rules regulating farming and forest practices. The measure does not require notice to adjoining or nearby property owners if a public entity decides not to enforce a land use regulation against a specific property, and the measure specifically provides that such a decision to waive a regulation is not a “land use decision,” meaning that neighboring property owners will not have a right of appeal to the state Land Use Board of Appeals.

Exceptions

The right to compensation does not apply if the regulation was enacted before the owner or a “family member” acquired the property. The measure broadly defines “family member” as including spouses, children, parents, certain in-laws, aunts and uncles, nieces and nephews, stepparents, stepchildren, grandparents and grandchildren – or the estates of those relatives. In the case of property inherited by the owner from a family member, the right to compensation could apply to regulations adopted decades ago. An eligible “family member” may also include a legal entity or corporation owned by the owner or one or more family members.

The right to compensation also does not apply to (i) regulations that prohibit common law public nuisances, (2) regulations that are required to comply with federal law, (3) regulations restricting or prohibiting the use of property for the purpose of selling pornography or performing nude dancing, and (4) public health and safety regulations such as fire and building codes, sanitation regulations and pollution control regulations.

Procedures

The measure includes a description of the procedures for filing a claim. If the land use regulation was enacted beforethe effective date of Measure 37, the claimant must file a written demand for compensation within two years of the effective date of the measure, or the date the

public entity applies the regulation as an approval criterion in a development application submitted by the property owner, whichever is later. If the regulation is enacted afterthe effective date of Measure 37, written demand must be made within two years of the enactment of the regulation, or the date the owner submits a land use application for which the regulation is a criterion, whichever is later. Since a property owner can decide when to submit a land use application, as a practical matter, property owners have control over when the two year claim filing limitation period starts to run. It is not clear, however, whether property owners who submitted applications that were denied prior to the enactment of Measure 37 are entitled to file a new application after Measure 37’s effective date so as to extend the limitations period for filing a claim, or whether such owners must file compensation claims within two years of measure’s effective date.

Within 180 days of receiving a demand for compensation, the public entity must decide whether to pay a claim or waive the regulation. If the public entity continues to enforce the regulation against the property after the 180 day period has expired, it must pay the property owner an amount equal to the reduction in fair market value of the property resulting from the enactment and enforcement of the regulation. If the public entity fails to pay, the property owner may sue in circuit court for the compensation plus attorney fees, court costs and any other expenses “reasonably incurred” in collecting the compensation. If the claim for compensation has not been paid within two years from the date it accrues, the owner must be allowed to use the property “as permitted at the time the owner acquired the property.”

Waiver of Regulations

As noted above, the measure provides that in lieu of payment of just compensation, the public entity responsible for enacting the land use regulation may modify, remove, or waive the land use regulation to allow the owner to use the property for a use “permitted at the time the owner acquired the property.” The measure specifically defines “owner” as the present owner of the property. Therefore, if property has been passed down through several generations of family members, the public entity responsible for enacting or enforcing the regulations can either pay compensation for the value of the property taken by regulations adopted since the property was first acquired by a family member, or it can waive regulations to allow the current owner to use the property for uses that were allowed at the time the current owner (but not his or her predecessors) acquired the property.

This presents very significant issues for any person considering transferring property to a relative, an entity owned by such person or even to a third party because if a public entity elects to not enforce the restrictive regulations against the property, uses that may be permitted in the hands of the current property owner could be lost if the property is transferred to a new owner (even if the owner is a family member), unless the regulations are waived (as a result of a compensation claim or land use application) before the transfer. Even then, it is not clear whether a waiver of regulations applicable to a current property ownership will follow the property into a new ownership.

Obviously, an analysis of the regulations that were in place at the time the current owner acquired the property is a necessary first step in determining whether a Measure 37 claim makes sense for the current owner, and also whether any steps should be taken to preserve the value of such a claim if the current owner proposes to sell or otherwise transfer the property to a new owner.

Unanswered Questions

The measure raises many questions that are not answered by the measure’s text. Some of the more significant questions include the following:

The measure defines “just compensation” as being “equal to the reduction in the fair market value of the affected property interest resulting from enactment or enforcement of the land use regulation as of the date the owner makes written demand for compensation * * * .” At first blush, that may seem straightforward enough, but what the measure doesn’t describe is how that reduction in value is supposed to be calculated. For example, the same regulations that greatly limit the construction of new dwellings outside of urban growth boundaries are arguably what make parcels that are zoned for one-acre rural residential development so valuable. In calculating just compensation, is a claimant property owner entitled to the benefit of regulations restricting other property owners’ use of their property, or must value be determined as if other property owners were similarly unburdened by the regulation that is the basis of the compensation claim? In other words, if a property owner wants to build a residential subdivision on a 100 acre farm and that is prohibited by the exclusive farm use (EFU) zoning enacted after the owner acquired the property, is the owner’s claim to just compensation based on the value of the land without the EFU zoning but assuming all other farms in the county are subject to the EFU zoning restrictions, or is the claim based on the value of the property as if all other farms in the county could similarly be developed without the development restrictions imposed by the EFU zoning?

To what extent will the 2005 Legislative Assembly amend the measure, and will those amendments, if any, apply to claims made before the amendments become effective?

How broadly will the exception for “health and safety” regulations be applied? Will that exception be narrowly construed, or will courts except entire categories of land use regulations (such as those regulating farm and forest lands) as being necessary for the “public health”?

To what extent will cities and counties be able to prevent the use or extension of public facilities (such as roads and water and sewer utilities) to limit the use of or development of property in a manner that is inconsistent with current land use regulations, even if the city or county elected to waive regulations with respect to a particular property in lieu of paying compensation?

If a public entity waives enforcement of a regulation with respect to a property, will an adjacent property owner have a claim against the public entity and/or the property owner who procured the regulation waiver if the value of the adjacent property is reduced by the waiver? (We understand that some local governments are considering enacting ordinances purportedly creating a private right of action to allow such claims against property owners who procure a regulation waiver as a result of Measure 37.)

Important Issues

Answers to the questions set out above (and others) will need to be resolved by the legislature and/or the courts. In the meantime, however, there are a number of immediate issues that should be considered by all persons who own or invest in real estate or who are otherwise involved in real estate matters.

Proposed property transfers. It is important to consider whether a contemplated transfer of property to a new owner may result in a loss of value that could otherwise be preserved through a different transaction structure. Such a structure might include using an option to purchase that includes the right of the purchaser to enforce a Measure 37 claim on behalf of the seller. Also, before transferring property to another family member or to a related business entity, the present owner should consider whether property uses permitted under the present ownership (if regulations are waived) will be lost if the property is transferred to a new owner before the present owner secures a waiver of the regulations and develops the property to its highest and best use under the waived regulations.

Real property acquisition due diligence. Property acquisition due diligence should now include an evaluation of the potential impacts of Measure 37. That may include an analysis of surrounding property ownerships to discover the potential of regulations being waived as a result of Measure 37. For the same reason that real estate investors require a Phase I Environmental Assessment to assess potential environmental contamination, in light of Measure 37, investors may want to consider requiring a land use assessment to evaluate the potential impact on the value of an acquisition property as a result of Measure 37 rights of adjacent property owners.

For example, assume that an investor is considering building a motel on a property located on a slightly elevated bluff that provides a fabulous view of the ocean. The value of the development property and the financial success of the proposed motel project are directly tied to the magnificent view afforded by the development property. Assume further that there is one property located between the beach and the development property (the “intervening property”) but that the elevation of the intervening property is 30 feet below that of the development property. Finally, assume that both properties are located in a zone that permits hotel and motel uses but that in 1980, the city enacted a 30-foot height restriction that applies to all property in the city.

Before Measure 37, land use due diligence would include investigating the zoning of the intervening property and other regulations applicable to it to verify that the view from the proposed development property will not be impaired by future development of the intervening property. The city’s building height limitation ordinance would protect the view from the development property and the investor/developer could proceed on that basis. Since the passage of Measure 37, however, proper due diligence likely includes determining when the building height restriction was enacted by the city, and investigating the ownership history of the intervening property to discover when the property was acquired by the present owner (and also when it was acquired by any prior owners who are also “family members” of the present owner).

Using the above example, if the present owner of the intervening property acquired the property in 1975 (before the height restriction was enacted), potentially that owner would be able to build a high‑rise hotel on the property (completely blocking the view from the development property) if the city decided to waive the height restriction in lieu of paying Measure 37 compensation. Since it seems unlikely that a city would be able to afford to pay the owner of the intervening property an amount equal to the reduction in value of the property caused by the height limitation, waiver of the height limitation with respect to the intervening property may be a real possibility that must be considered by any the prospective buyer of the development property, as well as any financial institution or other lender proposed to provide financing for the project.

Appraisal issues. The practice of real estate appraisal will also likely be impacted by Measure 37. For example, when appraising property located within an urban growth boundary, appraisers will now need to consider whether the measure will increase the inventory of property that can be developed outside of urban growth boundaries thereby potentially affecting the value of the appraisal property. Also, for the reasons discussed in the above example, a complete appraisal may also need to consider when land use regulations that apply to surrounding properties were enacted, as well as the ownership history of those surrounding properties. It may be that appraisers will except from their valuation analysis any impact of Measure 37, but that may not be acceptable to lenders or other persons who rely on appraisals in making business decisions.

Conclusion

For the reasons discussed above, Measure 37 creates potential development or compensation opportunities for some real property owners while at the same time raising new issues for everyone who owns or invests in real estate. Although there are many unanswered questions concerning Measure 37, anyone presently considering the purchase, sale or transfer of real estate should consider the possible impacts of Measure 37 on the transaction.

If you have questions about Measure 37 and how it may impact your present or future investments in real estate, please feel free to contact Paul Vaughan or Steve Cornacchia.

This Land Use Alert provides general information and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. If you have specific legal questions, you are urged to consult with counsel concerning your own situation.