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Home Builders Association of Greater Chicago v. City of Chicago

United States District Court, N.D. Illinois, Eastern Division

September 30, 2016

HOME BUILDERS ASSOCIATION OF GREATER CHICAGO, and HOYNE DEVELOPMENT LLC Plaintiffs,
v.
THE CITY OF CHICAGO, a municipal corporation, Defendant.

          MEMORANDUM OPINION AND ORDER

          REBECCA R. PALLMEYER United States District Judge

         Plaintiff Hoyne Development LLC (“Hoyne”) is a real estate developer. In 2012, Hoyne purchased commercial property in Chicago's 47th ward, intending to seek re-zoning and develop the property for residential use. Hoyne succeeded in getting the property re-zoned, but as a condition of obtaining building permits, the City of Chicago demanded that Hoyne comply with its Affordable Requirements Ordinance (“ARO”), a measure to increase the availability of affordable housing in Chicago. Specifically, the City required Hoyne to set aside two housing units for rent or sale to low-income residents, or pay a $200, 000 fee. Hoyne complied by paying the fee. It then filed this action in state court, alleging that the ARO constitutes a taking in violation of the U.S. and Illinois Constitutions, both facially and as applied to Hoyne. Hoyne also alleged a state law claim that the City exceeded its authority under the ARO in its application of the ordinance to Hoyne. Plaintiff Home Builders Association of Greater Chicago (“HBAGC”), a real estate trade association, joined Hoyne in the facial challenge to the ordinance. The City of Chicago removed the case to this court and moves to dismiss for failure to state a claim. For the reasons set forth here, the court grants the motion and dismisses Plaintiffs' complaint without prejudice.

         FACTS

         In May 2012, Hoyne Development signed a contract to buy two contiguous parcels at the corner of Irving Park and Hoyne in Chicago. (Compl. ¶ 11.) At the time of purchase, these properties were zoned as commercial properties.[1] (Compl. ¶ 12-13.) Hoyne intended to develop the properties as three buildings: two six-unit condo buildings, and one building with two apartments and retail space. (Compl. ¶ 14.) Hoyne applied for a zoning change that would allow for significantly greater density in the project, and for a special use authorization to allow residential units on the ground floor of the two six-unit buildings. (Compl. ¶ 15.) Such a zoning change, which allows for more development options, including more permitted uses and greater density, is referred to as “up-zoning.” (Def.'s Mem.in Supp. of Mot. to Dismiss (“Def.'s Mem.”) at 4); (Pl.'s Resp. to Def.'s Mot. to Dismiss (“Pl.'s Resp.”) at 8). The Chicago City Council approved the up-zoning and the authorization for ground floor residential units. (Compl. ¶ 17; Ex. 3 Def.'s Mem. at 44457.) Hoyne then applied to separate the properties into three separate tax parcels. (Compl. ¶ 17.) Hoyne later closed on the purchase and applied for building permits for the three buildings. (Compl. ¶ 18.)

         The City “placed a hold” on the permits in April 2013, and refused to issue them unless Hoyne complied with the City's Affordable Requirements Ordinance, Chicago Municipal Code 2-45-110 (“ARO”). (Compl. ¶ 1, 19.) The ARO applies, in relevant part, to “residential housing project[s]” of ten units or more when the property has been granted a zoning change that (1) increases the allowable density of the development, or (2) permits the development of residential units that were not allowed under the prior zoning designation. Chicago Municipal Code 2-45-110. If the ARO applies to a specific project, developers must either (1) dedicate ten percent of the new units as affordable housing for rent or sale for thirty years, or (2) pay a fee of $100, 000 per required unit into an affordable housing fund. Id. After thirty years, the units are no longer bound by the ARO restrictions. Id.[2]

         The City characterized Hoyne's three proposed buildings as a single “residential housing project” of fourteen units. (Compl. ¶ 19.) The City's policy has been to round up to the nearest whole number for purposes of calculating the required number of affordable units. (Compl. ¶ 23 & n.3.) Consistent with that policy, the City demanded that Hoyne either provide two affordable units or pay $200, 000 to comply with the ARO, and it refused to issue the building permits until Hoyne did so. (Compl. ¶ 19, 26.) Hoyne objected, asserting that the three buildings are not one project, and that even if the ARO does apply to the buildings as one project, two affordable units would exceed the ARO's ten percent requirement. (Compl. ¶ 20-21.) Hoyne nevertheless executed and recorded the City's “Affordable Rental Unit Covenant, ” designating two units as affordable housing, and sent the City a letter of protest. (Compl. ¶ 27-28.) On June 29, 2015, Hoyne paid $200, 000 to the City. (Compl. ¶ 30.)

         Hoyne and HBAGC then filed this suit. HBAGC members include other real estate developers who have also been required to comply with the terms of the ARO. (Compl. ¶ 46.) In Count I, both Plaintiffs seek a declaratory judgment that the ARO is unconstitutional on its face. (Compl. ¶ 47.) In Count II, Hoyne seeks a declaratory judgment that (1) that the ARO is unconstitutional as applied to Hoyne, and (2) that the City exceeded its authority under the ARO by requiring that Hoyne dedicate two units as affordable housing. (Compl. ¶ 51.) In Count II, Hoyne also reiterates its demand for a declaratory judgment that the ARO is “not enforceable.” (Compl. ¶ 52.)

         DISCUSSION

         I. Legal Standard

         To survive a motion to dismiss for failure to state a claim under Rule 12(b)(6), a complaint must contain sufficient facts to state a plausible claim, that is, “factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556 (2009)). When ruling on such a motion, the court presumes all well-pleaded facts in the complaint to be true, and views them in the light most favorable to the plaintiff. Doe v. Vill. of Arlington Heights, 782 F.3d 911, 914-15 (7th Cir. 2015). A viable complaint must include “enough facts to state a claim to relief that is plausible on its face.” Twombly, 550 U.S. at 570. Plausibility requires “more than a sheer possibility that a defendant has acted unlawfully.” Iqbal, 556 U.S. at 678. While a complaint does not need detailed factual allegations, mere conclusory labels or formulaic statements reciting the elements of a claim are not sufficient. Twombly, 550 U.S. at 555 (internal citations and quotations omitted). This same standard applies to constitutional claims under the Takings Clause. See Marozsan v. Speybroeck, 165 F.3d 32 (7th Cir. 1998) (unpublished table decision) (dismissing a claim where the plaintiff did not allege “that the rights lost [were] so essential to the use or economic value of [the] property that [a] state-authorized limitation of it amounted to a taking”) (second and third alterations in original) (internal citations and quotation marks omitted).

         II. Federal Law Claims

         A. The Unconstitutional Conditions Doctrine

         Plaintiff Hoyne contends the ARO violates the Constitution's Takings Clause both on its face (Count I) and as applied (Count II). Both challenges invoke the “unconstitutional conditions” doctrine, as articulated in Nollan v. California Coastal Commission, 483 U.S. 825 (1987) and Dolan v. City of Tigard, 512 U.S. 374 (1994). Under this doctrine, “the government may not require a person to give up a constitutional right . . . in exchange for a discretionary benefit conferred by the government where the benefit sought has little or no relationship to the property.” Dolan, 512 U.S. at 385. In Nollan, the California Coastal Commission conditioned a permit to demolish a house and build a new one on the owners' granting an easement to allow the public to cross the property. Nollan, 483 U.S. at 827-28. In Dolan, the government demanded that the property owner grant the city a strip of land as a condition for a permit that enabled the owner to redevelop its land and expand its business. Dolan, 512 U.S. at 379. In both cases, the Court held that such actions would be takings if they were simply ordered by the government, and that making these actions conditions of a building permit therefore required special examination. Dolan, 512 U.S. at 384-86; Nollan, 483 U.S. at 831, 841. If the government could not have ordered the action without violating the Constitution, then imposing the condition constitutes an unconstitutional taking unless the government can show an “essential nexus” between the condition and the end the government seeks to achieve, and a “rough proportionality” between the condition and the impact of the proposed development. Dolan, 512 U.S. at 391; Nollan, 483 U.S. at 837.

         Nollan and Dolan involved a dedication of property as a condition of permit approval. In Koontz v. St. Johns River Water Management District, 133 S.Ct. 2586, 2599 (2013), the Court held that monetary fees in lieu of dedicating property are also subject to the Nollan/Dolan test. In Koontz, the property owner applied for a permit to develop wetlands and offered to grant an easement over part of the remaining property to the government. Id. at 2592-93. The government demanded that the owner grant a larger easement or pay a fee. Id. at 2593. Reversing the Florida Supreme Court's ruling approving that condition, the Supreme Court held that a government cannot make an unconstitutional condition permissible simply by offering a fee alternative; doing so would make it “very easy for land-use permitting officials to evade the limitations of Nollan and Dolan.” Id. at 2599. Such a fee “must satisfy the nexus and rough proportionality requirements of Nollan and Dolan.” Id. The Court did not hold, however, that all fees related to property regulation must meet the “essential nexus” and “rough proportionality” requirements, see Id. at 2600 n.2 (declining to extend the holding to all monetary fees), and instead repeated that “[a] predicate for any unconstitutional conditions claim is that the government could not have constitutionally ordered the person asserting the claim to do what it attempted to pressure that person into doing.” Id. at 2598. In other words, whether the landowner is challenging the seizure of property or the imposition of a monetary fee, the landowner must show that government action constitutes a taking of a property interest under the Takings Clause in order to trigger consideration of the “essential nexus” and “rough proportionality” inquiries. See Id. at 2598-99 (examining, as a threshold matter, whether an easement would have violated the Constitution if the government had directly seized it, rather than making it a condition of the permit).

         In contrast to a seizure of property, a restriction on the use of property is not a taking that would require just compensation, unless it goes so far as to be a regulatory taking under Penn Central Transportation Co. v. City of New York, 438 U.S. 104 (1978). In that case, which upheld a restriction on the development of historic landmarks, the Court explained that some regulations can be takings “when justice and fairness require that economic injuries caused by public action be compensated by the government, rather than remain disproportionately concentrated on a few persons.” Penn Cent. Transp. Co., 438 U.S. at 107, 124, 138 (internal citations omitted); cf. Yee v. City of Escondido, Cal., 503 U.S. 519, 528-29 (1992) (“This Court has consistently affirmed that States have broad power to regulate housing conditions in general . . . without paying compensation for all economic injuries that such regulation entails.”) (quoting Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419, 440 (1982)). In Yee v. City of Escondido, 503 U.S. 519 (1992), a regulation set maximum rents for land rented to mobile home owners. Yee, 503 U.S. at 524. The Supreme Court held that this regulation was a permissible use restriction, not a dedication of property to the government akin to physical occupation of the land. Id. at 532.

         Because a permissible use restriction does not violate the Constitution, such a restriction cannot be an unconstitutional condition, and so does not even require consideration of the Nollan/Dolan test. See Cal. Bldg. Indus. Assn.. v. City of San Jose, 61 Cal.4th 435, 460, 351 P.3d 974, 990 (2015), cert. denied sub nom. Cal. Bldg. Indus. Assn. v. City of San Jose, Cal., 136 S.Ct. 928 (2016) (“Nothing in Koontz suggests that the unconstitutional conditions doctrine under Nollan and Dolan would apply where the government simply restricts the use of property without demanding the conveyance of some identifiable protected property interest (a dedication of property or the payment of money) as a condition of approval.”). In this case, the City of Chicago contends that the ARO is not a dedication of property, but is simply a use restriction like the maximum rent ceilings in Yee, and therefore the unconstitutional conditions doctrine does not apply, even without considering the fees-in-lieu option. (Def.'s Mem. 10-12.)

         At least in the complaint, Plaintiffs appear to have skipped one step in the analysis. Although the complaint alleges that the building permit is conditioned on complying with the ARO (Compl. ¶ 19, 33), the complaint contains no specific allegations that the ARO is the taking of a property interest without just compensation. Instead, Plaintiffs' allegations appear to assume that a requirement that units be dedicated as affordable housing implicates the Takings Clause, and then assert that the “essential nexus” or “rough proportionality” tests are not met. (Compl. ¶ 33-40.) In their memorandum in opposition to the motion to dismiss, however, Plaintiffs do argue that the ARO is both a physical invasion of Hoyne's property and a regulatory taking. (Pl.'s Resp. at 3-6, 10-12.) The court considers each of these arguments in turn.

         B. Hoyne's ...


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