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Potential Impact of Ballot Measure 49 on Existing Measure 37 Claimants

By Layne J. McWilliams and Eugene L. Grant
[August 2007]

As you have probably already heard, the Oregon legislature enacted House Bill 3540 that refers a new Ballot Measure 49 (“M49”) to the Oregon voters in the November 2007 election. If passed, M49 will significantly alter the existing law enacted under Ballot Measure 37 (“M37”). Following is an analysis of the potential effect that M49 will have on M37 claimants.

M49 addresses two fundamental groups of landowners: those who have already filed claims and those who have a claim, but have not yet filed. For existing M37 claimants, the analysis of the effect of M49 depends on where the property is located, what regulations are impacting development, and how far the claimant has progressed in the M37 process. These claimants are divided into three classes through the operation of Sections 5 to 11 of M49. Section 5 states that “existing” M37 claimants are those who filed on or before the date of the legislature’s adjournment (June 28, 2007).

The first class are those M37 claimants (“Class 1”) who have been issued M37 waivers and who have common law “vested rights” under those waivers. The second class are those claimants (“Class 2”) without vested rights and who own property in areas wholly or partially within a UGB and who are entitled to just compensation as defined in M49 Section 9. The third class are those claimants (“Class 3”) without vested rights who own property in areas outside an urban growth boundary (“UGB”) and who are entitled to “just compensation” as provided in M49 Section 6 or 7. Readers need not review this entire summary if only interested in certain classifications, as the relevant common information is repeated throughout.

M49 defines “just compensation” as “relief under sections 5 to 11 of [M49] for land use regulations enacted on or before January 1, 2007.” Thus, for existing M37 claimants (Class 1, Class 2 and Class 3), M49 will be the exclusive remedy. One cannot “opt out” of M49 and continue under M37 procedures.

For landowners who have not yet filed M37 claims (“Class 4”), the availability, the type, and the amount of relief has been reduced significantly. M49 addresses new claims in Sections 12 to 14. The relief available for future claims under Sections 12 to 14 is not addressed in this summary, but the impact of M49 on those owners who chose not to make M37 claims prior to the December 4, 2006, deadline is addressed in the last section of this summary.

One thing to note for all the existing M37 claimants: Under M49 Section 19, an owner who obtains an approved comp plan or zoning amendment cannot be granted relief for regulations enacted prior to the amendment application date. Similarly under M49, an owner who has successfully petitioned for annexation cannot be granted relief for regulations enacted prior to the date the annexation petition was filed. To the extent an existing claimant has received zoning or annexation approvals in the past, M49 would limit the scope of their claim.

I. Existing Claimant Class 1: M37 Claimants Holding Valid Waivers and Having Common Law Vested Rights in those Waivers

Section 5(3) of M49 states that claimants are entitled to “just compensation” under the M49 to the extent that (a) the claimant’s use complies with a valid waiver issued before the M49 effective date AND (b) the claimant has a common law vested right on the M49 effective date to complete and continue the use described in the waiver. This means that the claimant must have been issued all waivers required to build or develop, and the claimant must have commenced and prosecuted construction to a point where either a local development code deems the development rights vested or a court would find it inequitable to revoke or modify the owner’s entitlement to develop the improvements.

A. Valid Waiver

As to the issued waiver prong, if the claimant has a valid county waiver but not a state waiver (or vice versa), then the claimant is a Class 2 or 3 claimant, because a claim is still pending. A claimant cannot commence construction and obtain vested rights without all necessary waivers of the regulations that would otherwise prevent the proposed development. Similarly, claimants with valid waivers but without common law vested rights are Class 2 or 3 claimants.

B. Vested Rights

The issue of vested rights is nebulous. Oregon case law holds that if a person has relied on a land use decision granting a right to develop land, and that person has gone to sufficient expense to act on the right, then the development rights will be considered “vested.” A change in law cannot be used to deprive that person’s vested right without fair compensation. Clackamas County v. Holmes, 265 Or. 193, 197-198 (1973). Conceptually, this means that enough development work has occurred to confer pre-existing, nonconforming use status on the project, thus avoiding the application of the new requirements until redevelopment occurs. If no “bright line” rule exists under the applicable development codes for how much money or effort must have been expended on development before a right is vested, the courts have stated several factors to help determine whether the right should be considered vested. The factors include “(1) the ratio of prior expenditures to the total cost of the project, (2) the good faith of the landowner in making the prior expenditures, (3) whether the expenditures have any relationship to the completed project or could apply to various other uses of the land, and (4) the nature of the project, its location and ultimate cost.” Eklund v. Clackamas County, 36 Or. App. 73, 81 (1978), overruled on other grounds by Forman v. Clatsop County, 63 Or. App. 617 (1983), aff'd 297 Or. 129 (1984). Twin Rocks Watseco v. Sheets, 15 Or. App 445, 451 (1973), held that a building permit, without substantial action thereon, is not enough to establish a vested right.

It is important to note that the doctrine of “vested rights” is used by the courts to halt governmental action attempting to treat a development as an illegal use of land. The result will depend heavily upon the facts proven to the court with respect to the status of development. This process requires an expensive trial, and of course the government can appeal any unfavorable court decision.

To qualify, the rights must be vested by the effective date of M49, which is 30 days after the November election date. Therefore, for claimants who have valid waivers and who intend to develop property in reliance on those waivers, every effort should be made to complete as much construction as possible. Local development codes should be consulted to determine whether a standard is included as to when development rights will be vested. Unless the claimant is able to satisfy such a definition by December, 2007, moving forward with any construction is risky. Additionally, one factor the courts will look at is the owner’s good faith. Construction work may be considered in bad faith if done in the face of the pending M49 election, but the legislature could easily have set an earlier deadline for vested rights if they felt that development activity for purposes of vesting prior to the election would be in bad faith. The only “safe” vested rights would be those in place prior to the adoption of M49 and for property located in an area with a development code that defines the requirements for vesting.

C. Relief Available Under Vested Rights

M49 states the holder of vested rights is entitled to just compensation as defined in the waiver that permitted the development. There is no separate section that explains or elaborates on this language, although it appears to mean that M49 will not affect in any way the vested rights obtained prior to the deadline imposed by M49.

It is interesting to note, however, that Section 11 does describe what development would actually be allowed, and by the literal terms of the legislation, Section 11 applies to Class 1 claimants. Section 11(1) states that the subdivision, partition, or establishment of a dwelling must comply with all applicable standards governing the siting as well as the design, construction or size of lots, buildings, etc. However, the standards must not be applied in such a way to effectively prohibit the development unless the standards are reasonably necessary to prevent a nuisance, to protect public health and safety or to carry out federal law. It would be nonsensical for this to apply to Class 1 claimants, for if the project has progressed sufficiently to give the owner vested rights then inherently it is too late for such development entitlement standards to be applied.

Section 11(3) states that lots or parcels created under Section 5 are limited in size if they are in farm, forest or mixed farm-forest zones. For high-value or water limited land, the maximum lot size is two acres, for non-high-value land it is five acres. (There appears to be a typo regarding water availability between Sections 11(3)(a)A and (3)(a)B). If the lot size is limited to two acres, the lots must be developed in “cluster” type developments. These requirements also are nonsensical in the context of vested rights, since the project would presumably already be under construction.

Section 11(5) only allows a claimant to obtain a maximum of twenty single family dwellings (“SFDs”) in the state, regardless of the number of claims or properties owned by the claimant. This requirement is also nonsensical if more than twenty units are the subject of the vested development right. Commercial development is not restricted in the same way, at least for the Class 1 claimants. Although the wording of Section 11(5) expressly applies to all classes of claims, it is certainly questionable whether that is what the legislature really intended. How it will be interpreted and applied by the courts and local governments remains to be seen.

Section 11(6) “cleans up” the transferability and nonconforming use issues for existing claimants, but Class 1 claimants are excluded from this provision. Development built pursuant to vested rights is typically treated in local government development codes as a lawful nonconforming use that is transferable, but subject to loss of its lawful status if the use is ever discontinued or changed for a period of time such as 12 months, or if the structure is modified or expanded. See, for example, chapter 13 of the Wasco County Land Use and Development Ordinance. These restrictions make lenders less willing to accept lawful nonconforming buildings as adequate security for loans.

D. Suggested Advice for Class 1 Claimants

If a claimant has begun construction, then the appropriate course of action is to move forward to make as much progress as possible. This will give the claimant the best chance of obtaining recognition of “vested rights” and avoiding the limitations that will be placed on Class 2 or 3 claimants. The amount of construction work that must be completed is not specified in M49 but may be specified in the local development code. For example, the Wasco County Land Use and Development Ordinance, at Section 13.030, merely requires commencement of construction and completion of construction within one year of commencement to obtain vested rights status.

Remember also that there is an open question as to whether vested rights can be obtained by a M37 claimant for more than twenty lots if M49 passes. If the rights are vested prior to the effective date of M49, it seems more likely than not that a court would interpret M49 to not impair those pre-existing, vested rights to more than 20 lots, but this may need to be argued in court before it is resolved fully.

If a claimant has valid waivers but has not begun construction, at this point it would be risky to move forward. Because the “vested rights” doctrine is a form of estoppel under the equitable powers of the courts, the good faith of the landowner will be in question. After the passage of HB 3540 and the press coverage associated with it, one can imagine a court concluding that any landowner would be on notice of potentially significant changes to the relief available under the waiver system. On the one hand, beginning construction in the face of M49 may be seen as an act of bad faith, but on the other hand, the legislature could easily have set a different deadline in M49 that would have avoided this window of opportunity to vest M37 rights. The problem created by this issue over good faith is the unknown risk of expensive litigation to defend the vested rights against a neighbor or local government who seeks to block completion of the development and seeks removal of any completed work. Even if one prevails in the litigation, the cost of prevailing and the delay in completion may make the development unprofitable.

II. Existing Claimant Class 2: M37 Claimants with Pending Claims or Non-vested Waivers for Property Partially or Wholly Within an Urban Growth Boundary

For claimants who have claims still pending, either at the state or county level, or who have been issued waivers but have not yet acted on them, M49 may substantially change the relief available, particularly for property within an Urban Growth Boundary (UGB).

A. Procedural Issues

Section 5 states that existing claimants for property within a UGB are entitled to just compensation in accordance with Section 9. If a claim is pending, the public entity must notify the claimant of the new law’s requirements, and the claimant must submit information showing compliance with the Section 9 requirements within 120 days of receiving notice from the public entity. The entity then has 120 days to review the additional information submitted. According to Section 10, even if the claimant already has a valid waiver issued by Metro, a city, or a county, the claim must be reviewed again by the entity for compliance with the requirements of Section 9, and the claimant must make up any deficiencies in the record within 90 days after receiving notice from the entity. Presumably, a waiver would be revoked if the claim does not comport with the requirements of Section 9.

B. Section 9 Threshold Requirements

Section 9 of M49 significantly limits the types of property on which a claim may be based. There are several threshold qualifications to meet before relief can be granted:

1. The claimant must be an “owner.” Owner is defined in Section 2(16) as either the owner of fee title as shown in the deed records; a purchaser under a land sale contract; or the settlor of a revocable trust, except that when the trust becomes irrevocable, only the trustee is the owner.
   
   
2. All owners must have consented.
   
   
3. The property must be located, in whole or part, within the UGB.
   
   
4. As of the claimant’s acquisition date, the claimant was lawfully permitted to establish at least the number of single family dwellings (SFDs) authorized under Section 9. “Acquisition Date” is defined in Section 21 of M49 as the date the claimant became an owner as shown in the deed records of the county, except that (a) for multiple claimants for the same property and the same claim, the earliest acquisition date controls, (b) for surviving spouses of “owners in fee title” the acquisition date is date of marriage or date of owner’s acquisition, whichever is later, and (c) if the claimant conveyed to another person and then reacquired the property, by foreclosure or otherwise, the acquisition date is the date property was reacquired. Transfers into or out of entities that commonly hold property, such as LLCs, partnerships, or corporations, are not specifically addressed.
   
   
5. The property at issue must be zoned for residential use. Residential use is defined in Section 2(22) as “zoning that has as its primary purpose single-family residential use.” Thus, property zoned for primarily commercial, industrial, or institutional uses would be ineligible for claims under M49.
   
   
6. One or more non-exempt land use regulations prohibit establishing SFDs, and the regulation at issue must have been enacted after the property was brought into the UGB. If the property is within Metro, the limiting regulation must have been enacted after the property was included within boundaries of Metro. If the property is within a city, the regulation must have been enacted after the property was annexed by the city. Thus, waivers cannot be granted back to dates prior to the creation of the UGB, or the inclusion of the property in Metro, or the annexation of the property. Moreover, M49 limits the regulations to those enacted after the inclusion of the property, not just enforced. Thus, for example, existing city regulations that were simply enforced on the property when it was annexed cannot be waived. There is a legislative rationale for this limitation. When rural property is urbanized through the process of inclusion within a UGB or annexation to a city, the typical increase in value is so great that it more than adequately compensates the owner for any burden created by the rural zoning restrictions predating annexation or inclusion in a UGB.
   
   Note that the limiting regulations must “prohibit” the establishment of single family dwellings. One can debate whether environmental overlays actually “prohibit” dwellings as much as put limits on siting the dwelling. Most environmental restrictions act to force development into certain areas of the property, but there are cases where the restrictions, in concert with development standards, effectively eliminate the establishment of new dwellings. This would be an area open to argument.
   
   
7. To qualify for relief, the “highest and best use” of the property at the time of the enactment of the regulation must have been residential. This determination is part of the appraiser’s report described further below.

C. Available Relief

Assuming the prerequisites above are met, then Section 9 of M49 allows Class 2 claimants to establish a maximum of ten dwellings on portions of the property within the UGB. This is the only land use allowed by M49. Commercial, industrial, or institutional uses would not be allowed.

The actual number of SFDs allowed is the lesser of:

1. The number of SFDs granted by a previously issued waiver, or if a waiver was not issued, the number of dwellings described in the claim;
   
   
2. ten, except if dwellings already exist on the property, then the total number of new plus existing dwellings is limited to ten in total; or
   
   
3. “the number of [SFDs] the total value of which represents just compensation for the reduction in fair market value [FMV] caused by the enactment of one or more land use regulations that were the basis for the claim.” Section 9(2)(c).

“Reduction in FMV” is described in Section 9(6). It is the difference in FMV from one year prior to the enactment to one year after enactment of the regulation, plus interest. Any ad valorem taxes not paid due to special assessment plus interest shall be deducted, offset by any severance taxes paid and any recapture or additional tax liability paid. Interest is based on one year T-bill rates as of the end of each year compounded annually at the beginning of each year. To prove the reduction, an appraisal must be submitted that meets Section 9(7) requirements, and the cost of preparing the claim, up to $5000, can be added to the reduction in FMV calculation. Subsection 7 requires a certified appraisal report to establish the reduction in FMV.

M49 does not describe, however, how the value of the new SFD is to be appraised. The statement that “The appraisal also must show the fair market value of each single-family dwelling to which the claimant is entitled” in Section 9(7) implies the appraiser must determine the size and style of house that will maximize the value of the improved lot, since these are prospective and not actual SFDs that are being appraised. This appraisal method is an open question that may result in litigation to seek clarification.

FMV of the property would be calculated in accordance with Section 21(b) of M49. FMV is defined as the amount of money in cash the property would bring if offered by a willing but not obligated seller to a willing but not obligated buyer. It is actual value, with all of the property’s adaptations to general and special purposes. The FMV does not include prospective value, speculative value, or possible value based on future expenditures and improvements. Note that this is a major departure from the ordinary meaning of fair market value used by appraisers based upon the highest and best use of the property allowed by law rather than by its present use. This definition means the FMV of the property prior to the adoption of the regulation will be lower than if appraised as normal for its highest and best use, thus resulting in a smaller amount of reduction in FMV due to land use regulations. In short, the legislative modifications to the FMV definition will greatly minimize the number of SFDs that will be allowed if M49 passes. Also note that this definition appears to be intended only for the determination of the value of the property before and after the adoption of the regulation and not the determination of the FMV of the prospective dwelling units to which the owner is entitled. Reading it otherwise would create a complete internal conflict between the two sections of M49.

The “reduction in value” appraisal will be expensive, and it is quite possible that the appraisal will conclude that the reduction in FMV even after adding interest will not be large enough to justify even the ten SFDs allowed under M49. Note that the difference in FMV from one year before to one year after the regulation, as adjusted for interest and tax savings, must be more than the current fair market value of the SFDs to be built on the property under M49. The concept is that the owner can add the number of SFDs whose FMV is equal to or less than the reduction in FMV due to the prior land use regulation, up to a maximum of 10 SFDs. Because the reduction in FMV due to the land use regulation is defined favorably to the government, grossed up only according to T-bill interest rates rather than actual property appreciation rates, and is reduced by tax savings, in many cases the reduction in FMV will justify few, if any, additional SFDs.

One interesting note is that Section 11 of M49 does clean up the issue of transferability and nonconforming use of waivers for Class 2 claimants granted under Section 9, stating that these waivers run with the land and are transferable. The transferee must establish the dwellings within ten years of the conveyance, however. The dwellings will be permitted uses rather than lawful, nonconforming uses by virtue of Section 11. This avoids the application of code restrictions that can cause loss of the nonconforming use rights through discontinuance or change of the use and avoids restrictions against expanding the use, e.g. building an addition to a home. Additionally, Section 11(8) allows for cities, counties and Metro to establish, if they desire, a system for severing and trading development rights associated with waivers issued under M49 among the different jurisdictions. In this way, development could take place in locations different from where the right to develop arose. The jurisdictions are not obligated to set up such a system, however.

D. Suggested Advice for Class 2 Claimants

The best course of action for Class 2 claimants is to put everything on hold until after the November election. Reasons for this recommended course of action:

1. If the claimant has anything other than residentially zoned property, the claim would be dead if M49 passes. Similarly, if the claimant desires anything other than the ability to build new dwellings, M49 provides nothing.
   
   
2. For claimants who have residentially zoned property, and who are trying to overturn regulations predating the creation of the UGB or the inclusion of their property within the UGB, those claims will fail. There may be regulations that can be waived under M49, but it will not get the claimant back to their position prior to the UGB, Metro, or annexation.
   
   
3. For claimants who are trying to beat environmental protection or conservation overlays, if portions of the property are still “developable,” then M49 will probably serve to defeat the claim. Regulations that simply reduce the value of the property, without actually prohibiting development, cannot be waived under M49.
   
   
4. The “reduction in FMV” calculation for property will be expensive to determine, and will typically be relatively small, because of the definition of FMV in M49. This is particularly true in rural areas where demand for buildable residential lots was low at the time of the regulation’s enactment. The time-value multiplier based on T-bill interest will not be great compared to the appreciation in the value of the property over the same period of time. Thus, the number of allowed SFDs may be surprisingly low or none at all.

For Class 2 claimants that have been denied waivers and are considering an appeal, an effort should be made to toll the appeals period with the jurisdiction until the conclusion of the November election. In this way, the claimant will be able to maintain an appeal if Measure 49 fails, but will not be spending money needlessly if Measure 49 passes. There is some risk that a court would not accept an agreement by the parties, however, since the period for judicial review is a jurisdictional issue for the court.

If M49 passes in November, there will be a limited number of Class 2 claims that would be worth pursuing. A claimant with residential property that has been severely down-zoned due to a city’s redevelopment plans would have a potentially worthwhile claim. Careful consideration should be given to the likely results before a Class 2 claimant proceeds with the expense of obtaining an appraisal and preparing an application under M49.

III. Existing Claimant Class 3: M37 Claimants with Pending Claims or Non-vested Waivers for Property Wholly Outside an Urban Growth Boundary

M49 addresses claims on property located wholly outside a UGB and outside city limits in a more favorable manner. Class 3 claimants have the option to proceed under Section 6, which allows up to three SFDs, or Section 7, which allows up to ten SFDs.

A. Procedural Issues

Section 8 requires that the DLCD provide notice within 120 days of the effective date of HB 3540 to all claimants who have been approved or whose claims are still pending with the state. In addition, notice must be sent to claimants who have been denied waivers if they would now qualify under M49. The claimant must respond within 90 days of the notice by electing to proceed under Section 6 or 7 and filing any additional information needed. The appraisal required under Section 7 must be filed by the claimant within an additional 180 days following the notice of election. There are no time limits imposed on the state or counties for processing the returned Section 6 or 7 elections, only that they be processed as quickly as possible consistent with a careful review. The claims will be processed in the order received.

One item to note: for claimants who are surviving spouses and who were denied waivers because their spouse was on the title but they were not, Section 21(2) states that the surviving spouse’s acquisition date is the date of marriage or the date the deceased spouse acquired the property, whichever is later. Section 8 references 21(2) specifically as a clause that may revive an otherwise failed claim.

B. Section 6 “Fast Track” Threshold Requirements

Section 6 of M49 creates the “fast track” approval for up to three SFDs. The threshold qualifications to meet before relief can be granted are:

1. The claimant must have filed a claim with both the state and the county.
   
   
2. The claimant must be an “owner.” Owner is defined in Section 2(16) as either the owner of fee title as shown in the deed records; a purchaser under a land sale contract; or the settlor of a revocable trust, except that when the trust becomes irrevocable, only the trustee is the owner.
   
   
3. All owners must have consented.
   
   
4. Property must be located entirely outside the UGB and outside any city limits.
   
   
5. As of the claimant’s acquisition date, the claimant must have been lawfully permitted to establish at least the number of SFDs authorized under Section 6. “Acquisition Date” is defined in Section 21 of M49 as the date the claimant became an owner as shown in the deed records of the county, except that a) for multiple claimants for the same property and the same claim, the earliest acquisition date controls, b) for surviving spouses of “owners in fee title” the acquisition date is the date of marriage or date of owner’s acquisition, whichever is later, and c) if the claimant conveyed to another person and then reacquired the property, by foreclosure or otherwise, the acquisition date is the date the property was reacquired. Transfers into or out of entities that commonly hold property, such as LLCs, partnerships, or corporations, are not specifically addressed.
   
   
6. One or more non-exempt land use regulation must prohibit establishing the lot, parcel, or dwelling. Again, the limiting regulations must “prohibit” the establishment of SFDs, not simply limit their location.

C. Available Relief Under Section 6 “Fast Track”

Assuming the prerequisites above are met, then Section 6 of M49 allows a maximum of three SFDs. This is the only land use allowed by M49. Commercial, industrial, or institutional uses are not allowed. If the original claim requested relief for development of other than SFDs, the claimant can amend the claim to fit within Section 6 requirements.

Per Section 6(2), the actual number of new SFDs allowed is the lesser of:

1. The number granted by a previously issued waiver, or if a waiver was not issued, the number of the lots, parcels, or dwellings described in the claim filed with the state;
   
   
2. three, except if dwellings already exist on the property, or the property contains more than one lot or parcel, then the total number of new plus existing lots, parcels, or dwellings is limited to three in total.

However, if the claimant would be precluded from establishing any new SFDs under Section 6(2), Section 6(3) states that all claimants who otherwise qualify may establish at least one additional lot, parcel, or dwelling on the property.

No analysis of lost value or other qualifications are required under Section 6.

If a claim was filed after December 4, 2006 but prior to June 28, 2007, the DLCD must verify that the claim was filed in compliance with the applicable rules of the LCDC and DAS. (This means, in effect, that the claimant must show that a land use restriction was actually enforced on the property.)

D. Section 7 Threshold Requirements

Section 7 of M49 gives Class 3 claimants an opportunity to develop from four to ten SFDs. Threshold requirements for this section are more stringent than for Section 6 and are as follows:

1. The claimant must have filed a claim with both the state and the county.
   
   
2. The claimant must be an “owner.” Owner is defined in Section 2(16) as either the owner of fee title as shown in the deed records; a purchaser under a land sale contract; or the settlor of a revocable trust, except that when the trust becomes irrevocable, only the trustee is the owner.
   
   
3. All owners must have consented.
   
   
4. The property must be located entirely outside the UGB and outside any city limits.
   
   
5. As of the claimant’s acquisition date, the claimant must have been lawfully permitted to establish at least the number of SFDs authorized under Section 7. “Acquisition Date” is defined in Section 21 of M49 as the date the claimant became an owner as shown in the deed records of the county, except that a) for multiple claimants for the same property and the same claim, the earliest acquisition date controls, b) for surviving spouses of “owners in fee title” the acquisition date is the date of marriage or date of owner’s acquisition, whichever is later, and c) if the claimant conveyed to another person and then reacquired the property, by foreclosure or otherwise, the acquisition date is the date the property was reacquired. Transfers into or out of entities that commonly hold property, such as LLCs, partnerships, or corporations, are not specifically addressed.
   
   
6. One or more non-exempt land use regulation must prohibit establishing SFDs. The limiting regulations must “prohibit” the establishment of SFDs. One can debate whether environmental overlays actually “prohibit” SFDs as much as put limits on siting the SFDs. Most environmental restrictions act to force development into certain areas of the property, but there are cases where the restrictions, in concert with development standards, effectively eliminate the establishment of new SFDs. This would be an area open to argument.
   
   
7. To qualify for relief, the “highest and best use” of the property at the time of the enactment of the limiting regulation must have been residential as determined under Section 7(8). This will be an important factor, because for much of the rural property at issue, when the land use laws were enacted, the highest and best use may have been farming or forestry, especially in far outlying areas. Sufficient proximity to an urban area will be a key to obtaining relief under this Section.
   
   
8. The property must not be located on high-value farmland or forestland and must not be located in an area that is groundwater restricted.

E. Available Relief Under Section 7

Assuming the prerequisites above are met, then Section 7 of M49 allows a Class 3 claimant to establish a maximum of ten SFDs on portions of the property. This is the only land use allowed by M49. Commercial, industrial, or institutional uses are not allowed.

The actual number of lots, parcels, or dwellings allowed is the lesser of:

1. The number granted by a previously issued waiver, or if a waiver was not issued, the number of lots, parcels, or dwellings described in the claim;
   
   
2. ten, except if dwellings already exist on the property, or the property contains more than one lot or parcel, then the total number of new plus existing lots, parcels, or dwellings is limited to ten in total; or
   
   
3. “the number of home site approvals with a total value that represents just compensation for the reduction in fair market value [FMV] caused by the enactment of one or more land use regulations that were the basis for the claim.” Section 7(2)(c).

“Reduction in FMV” is described in Section 7(6). It is the difference in FMV from one year prior to the enactment to one year after enactment of the regulation, plus interest. Any ad valorem taxes not paid due to special assessment plus interest shall be deducted, offset by any severance taxes paid and any recapture or additional tax liability paid. Interest is based on one year T-bill rates as of the end of each year compounded annually at the beginning of each year. To show the reduction, an appraisal must be submitted that meets Section 7(7) requirements, and the cost of preparing the claim, up to $5000, can be added to the reduction in FMV calculation. Subsection 7 requires a certified appraisal report to establish the reduction in FMV.

M49 does not describe, however, how the value of the new SFDs is to be appraised. The statement that “The appraisal also must show the fair market value of each home site approval to which the claimant is entitled” in Section 7(7) implies the appraiser must determine the house that will maximize the value of the improved lot, since these are prospective and not actual SFDs that are being appraised. This appraisal method is an open question that may result in litigation to seek clarification.

FMV of the property would be calculated in accordance with Section 21(b) of M49. FMV is defined as the amount of money in cash the property would bring if offered by a willing but not obligated seller to a willing but not obligated buyer. It is actual value, with all of the property’s adaptations to general and special purposes. The FMV does not include prospective value, speculative value, or possible value based on future expenditures and improvements. Note that this is a major departure from the ordinary meaning of fair market value used by appraisers based upon the highest and best use of the property allowed by law rather than by its present use. This definition means the FMV of the property prior to the adoption of the regulation will be lower than if appraised as normal for its highest and best use, thus resulting in a smaller amount of reduction in FMV due to land use regulations. In short, the legislative modifications to the FMV definition will greatly minimize the number of SFDs that will be allowed if M49 passes. Also note that this definition appears to be intended only for the determination of the value of the property before and after the adoption of the regulation and not the determination of the FMV of the prospective dwelling units to which the owner is entitled. Reading it otherwise would create a complete internal conflict between these two sections of M49.

The “reduction in value” appraisal will be expensive, and it is quite possible that the appraisal will conclude that the reduction in FMV even after adding interest will not be large enough to justify even the ten SFDs allowed under M49. Note that the difference in FMV from one year before to one year after the regulation, as adjusted for interest and tax savings, must be more than the current fair market value of the SFDs to be built on the property under M49. The concept is that the owner can add the number of SFDs whose FMV is equal to or less than the reduction in FMV due to the prior land use regulation, up to a maximum of 10 SFDs. Because the reduction in FMV due to the land use regulation is defined favorably to the government, grossed up only according to T-bill interest rates rather than actual property appreciation rates, and is reduced by tax savings, in many cases the reduction in FMV will justify few, if any, additional SFDs.

F. Considerations for Home Sites Created Under Sections 6 or 7

One interesting note is that Section 11 of M49 does clean up the issue of transferability and nonconforming use of waivers granted to Class 3 claimants under Sections 6 and 7, stating that these waivers run with the land and are transferable. The transferee must establish the dwellings within ten years of the conveyance, however. The dwellings will be permitted uses rather than lawful, nonconforming uses by virtue of Section 11. This avoids the application of code restrictions that can cause loss of the nonconforming use rights through discontinuance or change of the use and avoids restrictions against expanding the use, e.g. building an addition to a home. Additionally, Section 11(8) allows for cities, counties and Metro to establish, if they desire, a system for severing and trading development rights associated with waivers issued under M49 among the different jurisdictions. In this way, development could take place in locations different from where the right to develop arose. The jurisdictions are not obligated to set up such a system, however.

Section 11(3) states that lots or parcels created under Section 7 are limited in size if they are in farm, forest or mixed farm-forest zones. For high-value or water-limited land, the maximum lot size is two acres, for non-high-value land it is five acres. (There appears to be a typographical error regarding water in 3aA and 3aB). And, if the property is limited to two acre lots, the lots must be developed in “cluster” type developments. Section 11(4) allows the claimant to cluster development onto one property if the claimant has vested rights to multiple properties.

Section 11(5) allows a claimant to obtain a maximum of twenty home sites in the state, regardless of the number of claims or properties owned by the claimant.

G. Suggested Advice for Class 3 Claimants

The best advice for Class 3 claimants is to put everything on hold until after the November election, with two possible exceptions. If passed, M49 will create an easier method for obtaining relief if the claimant is interested in one, two or three additional SFDs. If the claimant is willing to obtain relief under Section 6, then it would be prudent to review the claim information already submitted and amend it appropriately to fit within Section 6 requirements. In this way, the claimant will be in a position to be at the “front of the line” when the Section 6 and 7 reviews are started. In fact, it may be possible to submit that information before November, with a letter that states the information is to be included in the claim only if M49 passes.

Another possible “pre-emptive” move would be to obtain the services of a licensed appraiser, as they will presumably be in high demand in certain areas if M49 passes. This is only a concern for claimants who would be considering Section 7 relief.

For Class 3 claimants that have been denied waivers and are considering an appeal, an effort should be made to toll the appeals period with the jurisdiction until the conclusion of election. In this way, the claimant will be able to maintain an appeal if M49 fails, but will not be spending money needlessly if M49 passes. There is some risk that a court would not accept an agreement by the parties, however, since the period for judicial review is a jurisdictional issue for the court.

Finally, if M49 passes, there may be an opportunity for people who have the resources to “gather” development rights from many landowners. For the majority of claimants who will qualify for only one to three SFDs, the possibility of selling their waivers and keeping the land intact may be an interesting proposition.

IV. Class 4 “Potential” M37 Claimants Lose their Claims

Some landowners chose not to file M37 claims prior to the December 4, 2006 deadline. Under M37, a claim could be made for regulations “enacted or enforced” that caused a diminution in value. The December 4, 2007, deadline was to make claims for historical regulations without needing to show a governmental enforcement action. Under M37, a claim could be made after December 4th based on any prior land use regulations that were in fact enforced when the owner went through the development approval process. Thus, a landowner was not legally prejudiced by failing to file the M37 claim prior to the December 4 deadline. The only consequence was the expense of the make a “lost cause” application for development before the M37 claim could be prosecuted.

M49 eliminates these unfiled M37 claims based on past regulations. Section 5 addresses all M37 claims made prior to June 28, 2007 and provides relief under section 6, 7, or 9. Section 4 of M49 modifies M37 as codified and states that “If a public entity enacts one or more land use regulations that restrict the residential use of private real property or a farming or forest practice and that reduce the fair market value of the property, the owner of the property shall be entitled to just compensation . . . as provided in sections 12 to 14 of this 2007 Act.” The words “enacted or enforced” have been changed to simply “enacted.”

Section 12 states that a person may file a claim after June 28, 2007 if, among other things, the use of property is restricted by one or more land use regulations enacted after January 1, 2007. Under Section 13, the person must make a Section 12 claim within five years of the enactment.

Therefore, under M49, property owners who did not file a M37 claim before June 28, 2007 for regulations enacted prior to January 1, 2007 have lost their right to do so, forever. M49 effectively resets the land use clock at January 1, 2007, and provides only for just compensation on a going forward basis.

The purpose of this article is to make the firm’s clients aware of legal rulings that may affect the operation or value of their real estate holdings and investments. If you have any questions regarding these ballot measures or need assistance with your M37 claims, please feel free to contact any of the following attorneys:

Author: Layne J. McWilliams Portland, Oregon (503) 241-2300 laynemcwilliams@dwt.com

Author: Eugene L. Grant Portland, Oregon (503) 241-2300 genegrant@dwt.com

Other DWT contacts:
Gregory S. Hathaway, Portland, (503) 241-2300, greghathaway@dwt.com
Coni S. Rathbone, Portland, (503) 241-2300, conirathbone@dwt.com
Thomas S. Hillier, Portland, (503) 241-2300, tomhillier@dwt.com
Thomas S. Smith, Portland, (503) 241-2300, thomassmith@dwt.com
Gregory A. Chaimov, Portland, (503) 241-2300, gregchaimov@dwt.com
Christopher P. Koback, Portland, (503) 241-2300, chriskoback@dwt.com
E. Michael Connors, Portland, (503) 241-2300, mikeconnors@dwt.com
Jeff N. Evans, Portland, (503) 241-2300, jeffevans@dwt.com

This advisory is a publication of the Real Property Group of Davis Wright Tremaine LLP. Our purpose in publishing this advisory is to inform our clients and friends of recent legal developments. It is not intended, nor should it be used, as a substitute for specific legal advice as legal counsel may be given only in response to inquiries regarding particular situations.

Copyright © 2007, Davis Wright Tremaine LLP.

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