A school district may charge only limited mitigation fees on a redevelopment project in which new houses replace demolished residential units, the Fourth District Court of Appeal has concluded. The court held that the Tustin Unified School District could levy fees only on the difference in square footage between old apartments and the new houses that replaced the apartments. The school district appeared to lose the case because its fee study did not satisfy the court. "The fee study did not address the burden created by redevelopment construction, as opposed to new residential construction that did not displace existing housing, and thus did not show the requisite connection, or ‘nexus,' between the amount of the fee imposed and the burden created," Justice Eileen Moore wrote for the unanimous three-judge panel. The redevelopment project in question was the demolition of 56 apartments and construction of 38 single-family homes by Warmington Old Town Associates in Tustin. The school district levied its usual mitigation fee of $1.93 per square foot on the new houses, for a total fee of $122,080. Warmington said it should get credit for the demolished square footage and paid the fee in protest. Most school districts grant a square-footage credit for replacement housing, although the Education Code is unclear. When Tustin Unified refused to offset the full fee, Warmington filed a lawsuit. The developer argued that it should get credit for the 56 units it demolished, and that the district's fee study did not show a nexus between the new homes and student generation. Orange County Superior Court Judge John Woolley ruled that the school district was entitled only to the difference between the new construction (63,254 square feet) and the demolished units (47,500 square feet). The court ordered the district to refund $92,640 plus 10% annual interest. The Fourth District upheld the decision, but on a different basis than Woolley used. The trial court judge found that Education Code § 17620, subdivision (a)(1), distinguished between "new construction" and additions of more than 500 square feet. Woolley ruled that the Warmington project amounted to an addition, and he allowed the fee only for the difference between the old buildings and the new buildings, minus 500 square feet. The appellate panel held that the statute Woolley cited "was intended to refer to residential remodeling projects, not to total demolition and replacement." Instead, the court found that the school district had run afoul of the Mitigation Fee Act (Government Code § 66000 et seq.), which required the district to show a reasonable relationship between the impact of the project and the fee. The school district argued that its 1998 fee study provided adequate basis to levy the fee. But the court said the study fell short in the area of redevelopment projects. A school fee study must contain three elements, the court held, citing Shapell Industries, Inc. v. Governing Board, (1991) 1 Cal.App.4th 218 (see CP&DR Legal Digest, January 1992). The study must forecast the total amount of new housing expected to be built, it must determine the approximate number of students the housing will generate, and it must estimate the cost of providing school facilities to the additional students. Tustin Unified's study, "failed to meet the first and second prongs of the Shapell test," the court ruled. "It failed to meet the first prong to the extent that the projection of the total amount of new housing failed to take into consideration the demolition of housing units for redevelopment," Justice Moore wrote. "Similarly, it failed to meet the second prong because the fee study did not approximate the number of students to be generated by redevelopment (i.e., the difference between the number of students that previously inhabited redevelopment sites and the number of students projected to subsequently inhabit those sites)." The school district argued that it was too late to challenge the fee study, but the court disagreed, saying the district's compliance with the Mitigation Fee Act "was squarely before the court." The court upheld the entire refund, but lowered the interest rate to the 8% rate prescribed by Government Code § 66020, subdivision (e). The Case: Warmington Old Town Associates v. Tustin Unified School District, No. 02 C.D.O.S. 8013, 2002 DJDAR 10022. Filed August 30, 2002. The Lawyers: For Warmington: Don Fisher, Palmieri, Tyler, Wiener & Wilhelm, (949) 851-9400. For Tustin Unified: Wendy Wiles, Bowie, Arneson, Wiles & Giannone, (949) 851-1300.