What Exactly is a Development Agreement?
Development agreements, sometimes referred to as developer agreements, may be used to record a binding agreement between property owners and the local government concerning the future use and development of particular property. Development agreements are used in connection with approvals for zoning changes, project entitlements and other development approvals. These agreements are among the more detailed and comprehensive forms of municipally binding land use development contracts, enforceable on the public authority and the property owner.
A development agreement includes commitments by the municipality and the developer, often requiring the municipality to provide some incentive , concession or governmental action in exchange for the developer’s promise to perform or contribute in some way. The development agreement will bind a municipality to pre-existing ordinances and regulations, once the agreement is executed.
A development agreement is a means of implementing municipal land use laws that provide developers assistance in permitting, financing, constructing and maintaining land development. This contractual method can achieve the municipal policy goals and objectives of planned developments by controlling the timing of ordinances and permitting. The substantive provisions of a development agreement may bind a municipality, but the development agreement cannot bind the developer to perform certain acts or to refrain from doing so.
Key Elements of a Development Agreement
Regardless of the specific type of development agreement, a number of common elements tend to appear in virtually all forms of these development-oriented contracts. Typically, each iteration of a development agreement will contain a scope of work, which will afford the specific conditions and obligations placed on the development agreement parties when constructing new buildings or making major renovations to existing buildings or lots.
Beyond this, the development agreement will contain a clause stipulating that the developer is fully responsible for obtaining any and all permits prior to construction. There may also be a clause specifying by name those permits known to be required for the binding terms of the development agreement to be activated.
Some development agreements contain clauses requiring such things as bonding, insurance and other financial obligations. Further, the development agreement may also stipulate that the developer seize its right to future development opportunities offered by the local jurisdiction if the obligations of the agreement are not satisfied.
Advantages of a Development Agreement
A development agreement allows a developer to retain the right to complete its project and to pursue available remedies in the event of a breach of or failure to perform under the development agreement, and thereby provides a vital degree of legal certainty to the developer about the status of the property subject to the development agreement.
A development agreement also can provide a useful mechanism for the municipality and other interested parties to ensure that the development meets certain standards, and permits them to work with the developer to avoid conflicts, enhance the development and the prospects for its success, and minimize the likelihood of disputes regarding the development.
Because it is typically a comprehensive document that includes significant factual information supplied by the developer, and is crafted to be specific to the relevant development, it is often easier to read and easier to understand than the documents used by a municipality for the more routine approvals that are part of the development review process.
A development agreement also can help avoid some common disputes. To momentarily digress, a routine municipal approval process may involve many steps that are designed to ensure that a proposed development will adhere to all applicable standards, and that the developer is required only to undertake construction on the development in accordance with the approvals during the relevant period. This is usually accomplished by requiring the developer to obtain each approval in a specific sequence, and then to obtain additional approvals for more detailed plans, specific to that project, for the next step in the process. For example, a municipality may approve a proposed subdivision plan, with a condition stating that no building permits can be obtained until the conditions set forth in that approval have been satisfied, and the applicant has obtained engineering approval for the construction plans subject to the building permit process.
But sometimes this small-steps process in which each approval is backed by another approval for the next step in the process creates a situation where the developer faces interference by an objector to the approved development. The objector may object to the obtaining of a specific approval for a subsequent construction project on the same tract, thereby stalling the entire project. If this stall occurs, then the developer frequently is powerless to do anything to obtain the approvals needed for the next step in the process. This also can create a situation where an objector can hold the project hostage by temporarily agreeing not to block the developer from obtaining a specific approval, provided that the developer agrees not to close on the purchase of the tract or record a particular plat until the objector brings an action in court to seek a declaration regarding the validity of the approvals.
However, a development agreement can avoid this stalemate, as there is often no need for interim approvals given that the development agreement may reference detailed plans that have been conditionally approved as part of the development agreement, and the municipality has agreed to issue the permits subject to the developer’s compliance with its obligations under the development agreement.
Even though a municipal council typically approves contracts by ordinance rather than by resolution, a development agreement can, nevertheless, be approved by resolution. This is especially true when the development agreement is referenced in the ordinance that approves the development, together with other approvals that are required for completion of the development, and the related documents are attached to the approving ordinance.
However, development agreements are certainly contracts that have a significant impact on the future of municipalities and developers. Therefore, special care should be taken to have a sound and balanced agreement that reflects these interests properly.
Typical Clauses Found in a Development Agreement
Payment Terms – A payment terms clause usually identifies how much will be paid to the developer for the work performed. It sets a specific compensation rate, which can be either a flat fee and/or a specific hourly rate. Payment clauses can also tie payment to a certain event, such as completion of a certain set of deliverables or submission of a bill. In some cases, it may make sense tie payment to an installment schedule, if for example, the development of the property will occur in multiple phases or over an extended period of time.
Timelines – A timeline or term of the agreement clause sets a schedule for the project. For example, it might stipulate that the parties have up to 10 years to complete all aspects of the agreement, but shall exercise the option for a parcel within 3 years of the delivery of the vacant site. Having a timeframe codified in the agreement is important not only for tracking purposes, but also because such terms can help avoid costly litigation later on.
Performance Metrics – As applicable, the agreement may include a performance metrics clause that identifies certain outcomes that must be achieved. If the developer has agreed to build a certain number of apartments, for example, the agreement should state the minimum number that can be built or the minimum occupancy levels to be maintained.
Alternative Disputes Resolution – Many development agreements include alternative dispute resolution (ADR) clauses, which allow parties to easily resolve disagreements without resorting to litigation. Disputes can be submitted to mediation or arbitration. Mediation is often a good choice because both parties get to select the mediator, and a relatively quick resolution can be reached.
How to Negotiate a Development Agreement
Negotiating a development agreement is essential to ensure that a project moves forward without delay, and each party benefits as much as possible.
In addition to the typical elements of a development agreement listed above, here are some key points to keep in mind when negotiating a development agreement.
Dispute Resolution
Negotiating the terms of a development agreement and obtaining approval from the deciding authority can be a complex process with many contentious issues. Before entering into a development agreement, the parties should discuss and agree on how disputes will be resolved. When entering into a development agreement with the City of Boise, the City is unwilling to enter into an agreement if it requires litigation as the first means of dispute resolution. The City strongly prefers to resolve disputes through a non-judicial method, and points specifically to volunteers through the Idaho Mediation Association (IMA). Under the IMA, volunteers offer a neutral process for resolving a conflict at no cost to the parties. The City will also accept agreement to alternate dispute resolution (ADR) which involves a neutral mediation where the mediator helps parties to come to a non-binding agreement. The City does not accept other ADR (CBS News holds that mediation can be binding or non-binding) methods such as "rent-a-judge" under which parties can petition a court for judgment in a timely manner.
Good Faith Negotiation
If the parties have tentatively agreed to the terms of the development agreement but negotiations break down and no development agreement ultimately is reached, many jurisdictions will require the applicant to pay the legal fees incurred in connection with the preparation of the development agreement even if the applicant prevails in project negotiations with the city or county . This is because cities and counties incur significant legal fees once negotiations begin; therefore, if the project does not move forward the municipality still bears this significant cost. Boise’s policy with respect to good faith negotiation is set forth in the Development Agreement Administrative Policy.
Cost Sharing
Since the burden is on the developer, cost sharing is a requirement in many development agreements. However, it is important for developers to talk about what cost sharing really means. For example, at a minimum, the developer must pay a fee for project review (including development agreement review) in order to recover the City’s hard and soft costs associated with processing the application. The developer must also agree to pay relevant fees including connection charges, special assessments, and other similar charges. The City may also require payment for infrastructure services provided on behalf of the developer such as street lighting or road repair and maintenance.
Scope of Project
The initial scope of the project typically includes the property, the approved plan, and any agreements governing the project, but it is important that the parties carefully describe the project in order to avoid future problems. Any amendments need to be approved by both parties and resulting costs incurred by the City must be paid by the developer.
Expiration
The development agreement will state when the agreement becomes effective and state whether it runs for a specific time, predicts substantial completion, or has no expiration date. In Boise, development agreements signed by the City will be in effect up to twenty (20) years. However, the project is not guaranteed that run must commence within one year of signing.
Legal Issues in Development Agreements
Development Agreements hold the promise of an agreed level of detail to govern future development of a parcel of land or multiple parcels in the same area. But there is always a possibility of a legal challenge to a Development Agreement. One such area of potential legal challenge is whether or not a development agreement burdens a public agency financially, and there are several cases, albeit not related to Measure H6, in which the courts have determined that an agreement burdened a public agency and therefore was void.
A second area of potential legal challenge is whether or not a development agreement flows from a policy adopted by the local agency legislative body. There are cases related to development agreements (again not connected to Measure H6) where a local agency has not followed its own procedures for establishing or implementing a policy, and the courts have voided the development agreement as a result. Another area ripe for potential legal challenge is whether the local agency followed its own procedures in adopting the development agreement. Local agency procedures can be found in adopted ordinances, state statutes and other sources. If the agency fails to follow its procedures, the development agreement may be vulnerable. Another kind of potential legal challenge relates to conflicts of interest, for example, where a developer has a part-time employee who does business with the city or where the local agency’s chief financial officer is also its chief investment officer. These conflicts of interest must be avoided because violations of the Fair Political Practices Act can be severe and can result in a lawsuit against the local agency and its officers. Another area of potential legal challenge is the undertaking of mitigation measures. As we discuss below in the section on mitigation measures, the local agency must ensure that it can fund and implement all mitigation measures that it requires of a developer. The end result of a local agency failing to do so is that its mitigation measures may be unenforceable. Potential legal challenges related to projects near schools and other matters require the careful attention of the local agency because so much is at stake.
Case Examples of Effective Development Agreements
San Francisco
The long and arduous Catellus v. City of San Francisco case centers around the development of a high-rise office building in downtown San Francisco. After a 12-year negotiation process, which involved litigation, the trial court invalidated the ordinance that was created to allow the developer to build the structure. Despite the prolonged time period and heated litigation between the parties, the City’s development agreement with Catellus is still considered one of the most comprehensive and successful agreements with a private developer.
The agreement requires the construction of a parking garage for the project, along with improving City boulevards, plazas, and sidewalks. In exchange, the City agreed to allow Catellus to build office space on the site, on top of granting it density bonuses that were added to Catellus’ development rights. The City also agreed to pay the entire cost of the improvements, even though they were situated well outside the proposed project’s scope. However, the Catellus decision found that even without substantial modifications to the development agreement, like those suggested by the trial court (which the California Supreme Court ultimately rejected), the agreement still falls within the broad police powers of the City. In short, as long as a development agreement is within the scope of the police power and not an unreasonable burden, even radical changes to the agreement will not invalidate it.
Sacramento
The Fox Theatre in Sacramento first opened more than 90 years ago, which makes it the oldest continuously operating movie theater in the city, and one of only 50 still operating nation-wide. The City and operator of the Fox Theatre entered into a development agreement in 2000 to renovate and expand the historic structure. A year later, the City approved the issuance of special obligation bonds to finance the project.
In 2002 a group of neighboring landowners filed a lawsuit against the City, alleging that the City failed to conduct the legally-required environmental review before issuing the bonds and approving the project. The court found in the landowner’s favor, holding that the city’s approvals had a significant impact on the surrounding area and were subject to environmental review. In response to the decision, the City reviewed the project and adopted mitigated measures to minimize its environmental impacts.
The City’s review of the Fox Theatre project was perhaps the first of its kind in California. It highlights the importance of thoroughly reviewing and considering the environmental impacts of a project before approval, particularly where the project requires the issuance of bonds or some other action whereby the project begins to be implemented before completion of environmental review.
Emerging Trends in Development Agreements
As technology continues to impact every aspect of our lives and businesses, it is likely to influence the formation, enforcement, and dispute resolution mechanisms for development agreements. The use of smart contracts is a big idea, that is fast becoming a reality because it works in a similar way to ordinary contracts, but on computer systems that are secure, reliable and decentralized, meaning that you can access them anywhere and at any time. In other words, smart contracts are small, computer programs which, when the correct conditions are met, self-execute, ensuring that the terms of the contract are satisfied.
The rise of the Internet of Things (IoT) also poses a significant impact on how development agreements are used, administered and enforced. A development agreement could therefore include the ability to establish the status of the conditions and obligations at the time of the development work using data that has been collected and analyzed by connected devices . In the future, we will also see artificial intelligence (AI) being integrated into development agreements, and AI will be able to provide advice to clients on all aspects of the contract and its enforcement.
Other changes are also happening but will take time to materialize, and may be different in different jurisdictions. As I have mentioned above, there is significant potential for disputes in relation to development agreements given the long-term nature of the agreement, and so it is not surprising that alternative dispute resolution (ADR) options for development agreements are increasing. Industry specific bodies such as the Japan Center for Quality Assurance in Private Housing have also developed dispute resolution mechanisms for residential housing, and it is likely that more jurisdictions will seek to provide similar methods for dispute resolution in the future.