In Pakdel v. City and County of San Francisco, filed on March 17, 2020, a three-judge panel of the Ninth Circuit Court of Appeal voted 2-1 to affirm the dismissal of a property owner’s takings challenge against San Francisco’s “Expedited Conversion Program.” The law, which was enacted in 2013 and until 2024, allows a tenancy in common property to be converted into a condominium property, on the condition that an owner that does not occupy its unit offer any existing tenant a lifetime lease. The Lifetime Lease Requirement was designed to mitigate the displacement of tenants resulting from the accelerated condo conversion process that replaced a lottery system that permitted the conversion of only 200 TIC units each year and resulted in a backlog of conversion applications. The district court dismissed the case based on the plaintiffs’ failure to file suit in state court, and on appeal, the Court concluded that the takings claim was unripe due to the plaintiffs’ failure to obtain a final decision from the City regarding the application of the regulations to their property.

Facts and the ECP

Under the fact of the case, the plaintiffs, a couple from Ohio, purchased a TIC unit in a six-unit building in San Francisco in 2009, rented their unit to a tenant in 2010, and later contracted with the co-owners of the building to proceed to convert the building into condominium units with plans to move in once they retired. In 2015, after the ECP went into effect, the plaintiffs and building co-owners submitted an ECP application to the City and entered into an agreement with the City committing themselves to offer a lifetime lease as a condition of converting their property to their tenant. The plaintiffs did, in fact, offer their tenant a lifetime lease. Still, six months after the City approved their final conversion map following a public hearing, requested a waiver from the requirement to execute the lifetime lease or to compensate them for transferring a lifetime lease interest in their property. When the City refused their request, the plaintiffs filed suit against the City in federal court, asserting an as-applied challenge to the ordinance enacting the ECP alleged violation of the Takings Clause of the Fifth Amendment.

The district court granted the City’s motion to dismiss based on the plaintiffs’ failure to seek compensation for the alleged taking of their property through a state court proceeding. While the appeal was pending, the state-litigation requirement was eliminated by the Supreme Court in Knick v. Township (2019) 139 S.C. 2162. The Court held that the Fifth Amendment right to full compensation arises at the time of the taking, regardless of post-taking remedies that may be available to the property owner, so that a plaintiff is not required to seek compensation in state court for a federal claim to ripen.

The Court of Appeal Decision

On appeal, the City maintained that regardless of there being no requirement to file suit in state court, the plaintiffs’ takings claim was unripe due to the failure to satisfy the finality requirement. The government entity charged with implementing the regulations needed to reach a final decision regarding the application of the regulations to the property at issue. The Court agreed that the plaintiffs’ takings claim remained unripe because they never obtained a final decision regarding the application of the Lifetime Lease Requirement to their Unit.

As explained by the Court, the rationale for the finality requirement is that factors central to determining whether a regulatory taking occurred, such as the economic impact of the challenged action and the extent to which it interferes with reasonable investment-backed expectations, cannot be evaluated until the administrative agency has arrived at a final, definitive position regarding how it will apply the regulations at issue to the particular land in question. Moreover, the finality requirement “responds to the high degree of discretion characteristically possessed by land use boards” in applying their land use regulations to individual properties.

Under the U.S. Supreme Court decision in Williamson County Regional Planning Commission v. Hamilton Bank of Johnson City, 473 U.S. 172 (1985), a “final decision” exists when (a) a decision has been made about how a plaintiffs own land may be used; and (2) the local land-use board has exercised its judgment regarding a particular use of a specific parcel of land, eliminating the possibility that it may soften the strictures of the general regulations it administers. This rule means that a plaintiff must “meaningfully request and be denied a variance from the challenged regulation before bringing a regulatory takings claim.”

Conclusion and Implications

The Court concluded that the plaintiffs failed to satisfy the finality requirement by (1) failing to request an exemption from the Lifetime Lease Requirement during the ECP approval process, (2) failing to raise any objections to the conditional approval of the tentative conversion map prior to or at the public hearing, and (3) failing to appeal the approval of the tentative conversion map, pursuant to applicable procedures set forth in the San Francisco Subdivision Code. By the time the plaintiffs requested an exemption, they had expressly waived their right to do so and could not maintain that the City’s approval of the tentative map with conditions was equivalent to a final decision that no exemption would be granted.

The dissent disagreed, concluding the plaintiffs’ claim was ripe based on their belated attempts to request an exemption satisfied the finality requirement, as evidenced by the City’s clear and final rejection of the requests made by the plaintiffs in June 2017. The dissent opined that the decision establishes an administrative exhaustion requirement for a federal takings claim, which is not allowed by the law.

The City largely suspended the ECP pending the outcome of the lawsuit, while certain conversions for two-unit buildings, buildings without tenants, and eligible TIC buildings, may proceed with conversion applications.