The California Supreme Court released its opinion today in California Redevelopment
Association v. Matosantos, challenging the Legislature's
adoption of AB 1X 26, providing for elimination of California
redevelopment agencies (RDAs), and AB 1X 27, exempting from
elimination any RDA that agrees to make its share of a $1.7 billion
voluntary contribution of its revenues to other local government
The Court has upheld the Constitutionality of AB 1X 26 and
struck down AB 1X 27. The Court held that RDAs do not have a
Constitutionally protected right to continue to exist, however,
RDAs do have a protected right, pursuant to Proposition 22, to not
be forced to make payments to other agencies. While the State
argued that the payments under AB 1X 27 are voluntary, the Court
disagreed. The Court found that the payments under AB 1X 27 are not
in fact voluntary because an RDA would cease to exist if it did not
make the payment. Because the defective provisions within AB 1X 27
cannot be severed, the entire bill fails. Conversely, AB 1X 26 can
be severed from AB 1X 27.
As a result, AB 1X 26, which eliminates RDAs, remains in place
and AB 1X 27, which would have allowed RDAs to make a payment and
continue to exist, is struck down, meaning that RDAs are now
In its decision, the Court also upheld the "freeze"
provisions of AB 1X 26, which suspended the ability of RDAs to use
their funds or to incur new indebtedness. The Court's opinion
did not expressly address the effectiveness of the provisions of AB
1X 27 that purport to invalidate transactions entered into prior to
the effective date of the bill.
The Court invoked its power of reformation to extend all
applicable deadlines under AB 1X 26 by four months, the length of
the stay imposed by the litigation. Accordingly, for example, RDA
draft obligation schedules due on November 1, 2011 under AB 1X 27
will now be due on March 1, 2012.
The vote was 6-1. Chief Justice Cantil-Sakauye issued a
concurring and dissenting opinion arguing that both AB 1X 26 and AB
1X 27 are Constitutional.
As the court noted, the legislative record shows that at least
some legislators preferred to have the package of the two bills,
and did not desire to end redevelopment. Therefore, it is possible
that there may be a legislative attempt to revive AB 1X 27, or
something similar to it, with changes to address the Court's
concerns that the voluntary continuation payments were not
voluntary. Perhaps an approach would be to require that such
payments come from the local sponsor governments' general fund,
rather than from the agencies themselves. From a state fiscal
perspective, the ruling is good news, in that now substantially
more than $1.7 billion anticipated under AB 1X27 will be available
for the state budget crisis. So it is uncertain whether there will
be the votes necessary to resuscitate the continuation of
redevelopment agencies. It is seems even less likely that the
Governor, who started this by proposing to eliminate redevelopment
altogether, would sign such a bill.
County and school district officials will now begin the process
of forming successor agencies to begin the unwinding and
disposition of RDA assets. We can anticipate that agency
obligations that existed prior to January 1, 2011 will be fully
paid and performed. Successor agencies may also try to attack and
unwind RDA deals cut after that date, particularly protective
transfers from agencies to their local governments. In addition,
successor agencies may also try to avoid earlier conditional agency
obligations, for example, the sale of property for les than fair
market value where the sale obligation is conditioned upon other
financing to be approved by the agency.
After a run of more than 50 years, redevelopment and tax
increment financing for development in California have come to an
In a June 9th article on Law360.com, Simon Adams comments on the challenges commercial real estate investors face when seller are requiring prospective buyers to undertake due diligence in ever shortening time frames.