Predevelopment Loan Does Not Constitute Preapproval of Project under CEQA

Neighbors for Fair Planning v. City and County of San Francisco

(2013) ___ Cal.App.4th ___

A California Appellate Court has ruled that a lead agency’s predevelopment loan to a project applicant prior to the certification of an environmental impact report (“EIR”) did not constitute an unlawful “preapproval” of a project under the California Environmental Quality Act (“CEQA”).

The decision centered on the San Francisco Mayor’s Office of Housing (“MOH”) decision to execute a loan of $788,484 to the Booker T. Washington Community Service Center (“Center”) for predevelopment activities relating to the Center’s proposal to replace an existing community center and housing project. The loan, which amounted to four percent of the $20 million needed to the complete the project, was intended for architectural and engineering design, survey and appraisal preparation, preparation of environmental studies, CEQA and NEPA review, legal expenses, loan fees, cost estimates and associated administrative work. According to the loan agreement, the center was required to repay the loan in full regardless of whether the project was ultimately approved. The loan agreement expressly stated that the City of San Francisco (“City”) was not committing itself to the project, and that the City had the discretion to disapprove the project upon consideration. The Planning Commission certified the EIR and approved the project six months after MOH executed the loan.

A citizens’ group sued, arguing that the predevelopment loan constituted an unlawful “preapproval” of the project. This preapproval, according to the plaintiff, violated the well-established rule that project approval must occur after, not prior to, the certification of an EIR. The group relied on Save Tara v. City of West Hollywood (“Save Tara”) (2008) 45 Cal.4th 116, in which the California Supreme Court held that a predevelopment loan for an affordable housing development constituted such an unlawful “preapproval.”

The Appellate Court rejected these contentions, holding that, unlike the loan agreement in Save Tara, the loan agreement between MOH and the Center unambiguously stated the City did not commit itself or otherwise endorse the project by financing predevelopment activities. Further, the court noted that it was significant that the developer in Save Tara was not required to repay the predevelopment portion of the loan unless the project was approved. If it was not, the money advanced for predevelopment costs would be at a total loss to the City of West Hollywood. Such an unrecoverable financial commitment, according to the Save Tara Court, ripened into a “commitment” and thus constituted an approval of the project. The court distinguished the facts here, however, noting that MOH would be reimbursed whether or not the project was approved, and thus did not commit to the project.

The decision is noteworthy because it sets defined parameters with respect to when a lead agency’s financial assistance to developers for predevelopment costs constitutes an “approval” under CEQA. The decision suggests that a predevelopment loan will pass judicial muster so long as the agreement explicitly states that the lead agency does not commit itself to approving the project. To support such statement, the loan agreement should require reimbursement to the lead agency regardless of whether the project will be approved.

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