Litigant's Failure to Establish Basis for Property Tax Base Transfer Highlights the Need to Exercise Special Care in Administrative Proceedings to Ensure that Judicial Remedies are Preserved

May 22, 2012

By Matthew Hinks

May a property owner who sells property to a non-governmental entity as part of a government redevelopment project under the threat of eminent domain transfer the tax base of the original property to replacement property? Not on the record presented by the plaintiff in Duea v. County of San Diego, 204 Cal. App. 4th 691 (2012).

Proposition 13 froze real property taxes at their 1976 levels subject to reassessment only in limited circumstances -- most commonly, a change in ownership. In addition, the California Constitution exempts certain transfers that would otherwise require reassessment. One such exemption excludes from the definition of "change in ownership", real property acquired as a replacement for comparable property following (1) the exercise of "eminent domain proceedings", or (2) an acquisition by a "public entity".

David Duea had a compelling case to make that he had been forced under the treat of eminent domain to sell to an entity acting as an agent for a public entity. He owned property in downtown San Diego. He operated a business on that property and adjacent property he leased from SDG&E. In November 1998, the voters of the City of San Diego approved a memorandum of understanding between the City, the City's Redevelopment Agency, Centre City Development Corporation ("CCDC") and the Padres, L.P. concerning the establishment of a ballpark district, the construction of a baseball stadium and a redevelopment project around the new stadium.

In furtherance of the ballpark project, parcels of property surrounding Duea's were acquired by public entities after condemnation proceedings were initiated. The property leased by Duea from SDG&E was sold to JMI Realty, Inc., the master developer of the commercial redevelopment project. JMI Realty then approached Duea to purchase his property "in order to carry out the MOU". Duea sold the property for $1.1 million. CCDC later confirmed that the acquisition was done for use in connection with the ballpark project and that it would have condemned the property under its power of eminent domain if Duea refused to sell.

Following the sale, Duea purchased replacement property for $535,000. He then filed with the County Assessor a Claim for Base Year Transfer -- Acquisition by Public Entity, in order to transfer the tax base of the original property to the replacement property urging that he had been displaced from the original property by the "functional equivalent" of eminent domain proceedings. The Assessor denied the application, a decision that was subsequently affirmed by the County Assessment Appeals Board (the "Board") and the trial court.

Duea had no better luck in the Court of Appeal. Duea did not challenge the Board's ruling to the extent it rejected Duea's argument that the threat of eminent domain is the "functional equivalent" of eminent domain proceedings. Instead, Duea urged, as he had done for the first time in the trial court, that JMI Realty was an agent of the City, CCDC or the redevelopment agency when it acquired Duea's property.

The Court of Appeal rejected the argument. Initially, the court rejected Duea's argument that he was entitled to a de novo trial on the facts found by the Board and limited its review to determining whether substantial evidence existed in the administrative record supporting the Board's decision. The court further held that there was not sufficient evidence in the administrative record to compel the conclusion that JMI Realty acted as agent for one of the aforementioned public entities. Finally, the court held that Duea could not pursue the argument in the court of appeal in any event because he had failed to raise it in the proceedings before the Board and thereby failed to exhaust his administrative remedies.

The lesson of Duea is that too often a prospective plaintiff's proverbial goose is cooked before he or she even walks through the courthouse doors. This happens because arguments have not been raised in administrative proceedings that should have been or the party has not done enough to ensure the administrative record allows for effective judicial review. A party to administrative proceedings and his or counsel need to be forward looking where litigation can be anticipated or is contemplated following administrative proceedings. Given the limited and deferential form of judicial review of most agency decisions, special care must be taken to ensure that judicial remedies are preserved in the case of an adverse administrative determination.
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Matthew Hinks is a litigator with a wide-ranging practice that focuses primarily on the representation of real estate developers in difficult land use cases. Matt has extensive experience litigating complex mandamus actions and other claims involving signage disputes, governmental takings, CEQA challenges, planning and zoning law, civil rights violations, eminent domain issues, title disputes, lease disputes and community redevelopment and density bonus law. He has extensive experience in both federal and state courts, including trial courts and courts of appeal, as well as in arbitration, mediation and administrative settings. Contact Matt at MHinks@jmbm.com or 310.201.3558.