California Appeals Court Offers Guidance on When an Agency's Agreement With a Developer Requires Environmental Review Under CEQA

Does an agency’s agreement with a developer establishing detailed terms for a proposed development require environmental review under the California Environmental Quality Act (CEQA)? Not necessarily, according to a recent decision by a California Appeals Court.

In Cedar Fair, L.P. v. City of Santa Clara, et al. (Mar. 28 2011, H035619) __ Cal. App. 4th __, the Sixth Appellate District held that adoption of a term sheet (an agreement) by the City of Santa Clara, establishing financial and other terms to build the new San Francisco 49ers NFL stadium with the city’s Redevelopment Agency and 49ers, was not a “project” under CEQA requiring an environmental impact report (EIR). The decision offers much needed guidance on what terms a public agency may approve without triggering environmental review under CEQA.

When an Agreement for Development Is a “Project” Under CEQA

In 2008, the California Supreme Court addressed a similar question in Save Tara v. City of West Hollywood (2008) 45 Cal.4th 116 (Save Tara). At issue in that case was whether a conditional development agreement for low income housing was a “project” under CEQA. The key question was whether the agreement between the City of West Hollywood and the developer foreclosed some aspect of environmental review by effectively precluding alternatives or mitigation measures under CEQA, including the no project alternative. (Save Tara, 45 Cal.4th at 139). The California Supreme Court found that the agreement did foreclose environmental review and, therefore, was a project, for the following reasons:

• The city committed to loaning $500,000 to the developer that would only be repaid if the development proceeded.
• The agreement included early relocation of tenants that occupied the existing structure.
• The agreement legally may have bound the city to proceed.
• The city council’s resolutions indicated that the city was committed to building the project. (Id. at 140 - 142).

In short, the city had committed to the project. The Save Tara decision provides an example of an agreement that requires preparation of an EIR.

When an Agreement for Development Is Not a “Project” Under CEQA

By contrast, the Cedar Fair decision provides an example of an agreement that does not require preparation of an EIR. This example is particularly important as it provides guidance to agencies and developers that are considering a public-private partnership early in a project’s planning stages. The agreement included the following provisions:

• memorialization of non-binding, preliminary terms
• subjecting future agreements and development to CEQA review
• seating capacity, size of the stadium and the term of years for the site lease
• development fees to be paid by the 49ers stadium subsidiary
• responsibilities for management and operation of the stadium and parking

•  future financing of the project, including reimbursable expenses and entitlements to stadium operating revenue 

Based on the agreement’s flexibility that allowed the city to alter the project after environmental review or reject the project entirely, the Cedar Fair court held that the non-binding agreement to continue negotiations in good faith, conditioned on CEQA compliance, did not foreclose future environmental review. Therefore, it was not a “project” subject to CEQA. The specific details on financing and project size in the agreement did not make the agreement a “project” under CEQA. Additionally, the city’s support for the stadium through public statements and funding for consultants did not turn the early, non-binding agreement into a project.

Conclusion

In summary, the Cedar Fair decision held that an agreement to agree is not a “project” subject to CEQA. The decision allows agencies and developers to negotiate preliminary terms of a development, no matter how detailed, as long as the agreement is not binding on the parties and is conditioned on future CEQA review. Agencies and developers should be aware, however, that the inclusion of language making the agreement conditional on CEQA compliance does not automatically exempt it from environmental review. A court may determine that regardless of the conditional CEQA compliance language, the agreement, as a practical matter, commits the agency to the development and is subject to environmental review.

The term sheet for the 49ers stadium provides other agencies and developers with a strong working model of an early agreement for development that does not trigger CEQA.